Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 27, 2011 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-14225 EXAR CORPORATION (Exact Name of Registrant as specified in its charter) Delaware 94-1741481 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 48720 Kato Road, Fremont, CA 94538 (Address of principal executive offices, Zip Code) Registrant’s telephone number, including area code: (510) 668-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of exchange on which registered Common Stock, $0.0001 Par Value The NASDAQ Global Market SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yes ¨ No x Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x The aggregate market value of the outstanding voting stock held by non-affiliates of the Registrant as of September 26, 2010 was approximately $118.4 million based upon the closing price reported on The NASDAQ Global Market as of the last business day of the Registrant’s most recently completed second fiscal quarter. Approximately 23.7 million shares of common stock held by officers, directors and persons known to the Registrant to hold 5% or more of the Registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the Registrant’s Common Stock was 44,590,821 as of May 27, 2011, net of 19,924,369 treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s 2011 Definitive Proxy Statement to be filed not later than 120 days after the close of the 2011 fiscal year are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Report.
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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 27, 2011
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
Commission File No. 0-14225
EXAR CORPORATION(Exact Name of Registrant as specified in its charter)
Delaware 94-1741481(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification Number)
48720 Kato Road, Fremont, CA 94538(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (510) 668-7000SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registered
Common Stock, $0.0001 Par Value The NASDAQ Global Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yes ¨ No xIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on it corporate Website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§229.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.
Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xThe aggregate market value of the outstanding voting stock held by non-affiliates of the Registrant as of September 26, 2010 was
approximately $118.4 million based upon the closing price reported on The NASDAQ Global Market as of the last business day of theRegistrant’s most recently completed second fiscal quarter. Approximately 23.7 million shares of common stock held by officers, directorsand persons known to the Registrant to hold 5% or more of the Registrant’s outstanding common stock have been excluded in that suchpersons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant’s Common Stock was 44,590,821 as of May 27, 2011, net of 19,924,369 treasuryshares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s 2011 Definitive Proxy Statement to be filed not later than 120 days after the close of the 2011 fiscal year areincorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Report.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35 Item 6. Selected Financial Data 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 58 Item 8. Financial Statements and Supplementary Data 59 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 105 Item 9A. Controls and Procedures 105 Item 9B. Other Information 106
PART III
Item 10. Directors, Executive Officers and Corporate Governance 107 Item 11. Executive Compensation 107 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 107 Item 13. Certain Relationships and Related Transactions, and Director Independence 107 Item 14. Principal Accounting Fees and Services 107
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statementsare generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “could,” “expect,”“suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements contained in this Annual Reportinclude, among others, statements made in Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Executive Summary” and elsewhere regarding (1) our revenue growth, (2) our future gross profits and margins, (3) our futureresearch and development efforts and related expenses, (4) our future selling, general and administrative expenses, (5) our cash and cashequivalents, short-term marketable securities and cash flows from operations being sufficient to satisfy working capital requirements andcapital equipment needs for at least the next 12 months, (6) our ability to continue to finance operations with cash flows from operations,existing cash and investment balances, and some combination of long-term debt and/or lease financing and sales of equity securities, (7) thepossibility of future acquisitions and investments, (8) our ability to accurately estimate our assumptions used in valuing stock-basedcompensation, (9) our ability to estimate and reconcile distributors’ reported inventories to their activities, (10) our ability to estimate futurecash flows associated with long-lived assets, (11) the volatile global economic and financial market conditions, and (12) anticipated impactsof our exit of the 10 gigabit Ethernet market. Actual results may differ materially from those projected in the forward-looking statements as aresult of various factors. Factors that could cause actual results to differ materially from those included herein include, but are not limited to,the factors contained under the captions Part I, Item 1—“Business,” Part I, Item 1A—“Risk Factors” and Part II, Item 7—“Management’sDiscussion and Analysis of Financial Condition and Results of Operations.” We disclaim any obligation to update information in anyforward-looking statement. ITEM 1. BUSINESS
OVERVIEW
Exar Corporation and its subsidiaries (“Exar” or “we”) is a fabless semiconductor company that designs, sub-contracts manufacturingand sells highly differentiated silicon, software and subsystem solutions for industrial, telecom, networking and storage applications. Our coreexpertise in silicon integration, system architecture and software has enabled the development of innovative solutions designed to meet theneeds of the evolving connected world. Our product portfolio includes power management and interface components, communicationsproducts, storage optimization solutions and network security solutions. Applying both analog and digital technologies, our products aredeployed in a wide array of applications such as portable electronic devices, set top boxes, digital video recorders, telecommunication systems,servers, enterprise storage systems and industrial automation equipment. We provide customers with a breadth of component products andsubsystem solutions based on advanced silicon integration.
Exar was incorporated in California in 1971 and reincorporated in Delaware in 1991. Our common stock trades on The NASDAQGlobal Market (“NASDAQ”) under the symbol “EXAR”. See the information in Part II, Item 8—“Financial Statements and SupplementaryData” for information on our financial position as of March 27, 2011, March 28, 2010 and March 29, 2009, and our results of operations andcash flows for our fiscal years ended March 27, 2011, March 28, 2010 and March 29, 2009.
On March 16, 2010, we completed the acquisition of Neterion, Inc. (“Neterion”), a developer of 10 gigabit Ethernet(“10GbE”) controller silicon and card solutions optimized for virtualized environments located in Sunnyvale, California. During the course offiscal 2011, we participated in the 10GbE market and established a limited set of customers but fell short of our revenue goals for the productline. After assessing our position in this market and our product development roadmap, we announced on March 4, 2011 that we had decidedto exit
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the data center virtualization market and, in connection therewith, had decided to discontinue development of these products. We immediatelyreduced our resources and began a process to sell assets devoted to the development of these products.
On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (“Galazar”). Galazar, based in Ottawa, Ontario, Canada, wasa fabless semiconductor and software supplier focused on carrier grade transport over telecom networks. Galazar’s product portfolioaddresses transport of a wide range of networking and telecom services including Ethernet, TDM, Fiber Channel and video overSONET/SDH, PDH and OTN networks.
On April 3, 2009, we completed the acquisition of hi/fn, inc. (“Hifn”), a fabless semiconductor company that was founded in 1996, spunoff from Stac, Inc. in 1999 and traded on The NASDAQ Stock Market under the symbol “HIFN” since 1999. The acquisition of Hifnexpanded and complemented our product offering in the enterprise storage, networking and telecom markets where we have had a significantbase of business for more than 10 years. The Hifn technology added world class compression and data deduplication products used in storageapplications to optimize data and speed up data backup and retrieval. Hifn had also been a leading provider in security acceleration technologyby providing encryption and compression products to leading networking and telecom system manufacturers. The Hifn products complementour connectivity solutions and provide us with a more significant product offering to our customers.
On August 25, 2007, we acquired Sipex Corporation (“Sipex”), a fabless semiconductor company that designed, manufactured andmarketed high performance, analog integrated circuits (“ICs”) used by original equipment manufacturers (“OEMs”) in the computing,consumer electronics, communications and networking infrastructure markets.
Our products are organized into four product lines, which provide product definition based on market opportunities and trends. Productline orientation also allows for the concentration of technical expertise around the common market and strategic customer focus to bondproduct solutions to the largest users in a given market segment. Our product lines are defined as Interface Products, Power ManagementProducts, Communications Products and Datacom and Storage Products.
We believe our core competencies and key initiatives include:
Leading Analog and Mixed-Signal Design Expertise—We have over 40 years of proven technical competency in developing analog andmixed-signal ICs. As a result, we have developed a deep understanding of the subtleties of analog and mixed-signal design and acomprehensive library of analog core blocks. We leverage this expertise across the broad range of products we develop. From programmablepower management chips to advanced telecom products, our products share a heavy concentration of analog and mixed-signal content toachieve high performance, power efficient solutions.
Comprehensive Solutions to Enhance System Integration—The combination of our design expertise, diverse circuit technology andsystem-level expertise enables us to provide comprehensive solutions that encompass hardware, software and applications support. Forexample, we have developed many digital blocks and engines that are used in data aggregation, transmission, acceleration and computeroffload. We believe that by using our solutions, OEMs can develop higher performance systems, better leverage their development resourcesand reduce their time-to-market.
Connectivity Solutions—A focus on connectivity remains a key strategic direction that drives our product strategies and serves as afoundation for customer engagements. Expanding the range of connectivity solutions has driven our acquisition activity in the last two years.With the addition of system architecture expertise we have extended our portfolio of products to offer new silicon products, cards andsoftware to support the demand for system solutions in addition to component products. Our connectivity solutions span a range ofapplications
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that serve industrial, networking, storage and telecom applications. Our devices facilitate and optimize the virtual handshake between systemsand across networks.
Compelling Performance Solutions—We use our systems expertise and our analog, digital and mixed-signal design techniques toarchitect high-performance products based on standard Complementary Metal Oxide Semiconductor (“CMOS”) process technologies. Thediversity of our technology enables us to develop differentiated solutions for our target markets.
Conscious Preservation Initiative—Environmental concerns have a direct impact on electronic components and products. We arecommitted to reducing the impact that the end use and manufacturing of our products may have on the environment. We have taken theinitiative to offer a portfolio of “green” products by transitioning our manufacturing processes to offer parts that meet or exceed the Restrictionof Hazardous Substances Directive (“RoHS”) requirements and are halogen-free.
MARKETS AND PRODUCTS
Datacom and Storage
Our datacom and storage product portfolio provides a range of solutions for OEMs to efficiently optimize, secure, and transport data innext generation data centers. Our value proposition is driven by underlying hardware offload technology. The concept behind hardwareoffload is to use efficient, dedicated hardware to provide functionality that would otherwise need to be done with power-hungry and costlyhost processors. General-purpose application processors are very flexible, but inefficient. The advantages of hardware offload are:
• High performance and scalability—the hardware is dedicated to a specific task and architected for parallelism
• Low power—dedicated hardware is highly efficient
• Data integrity—results of calculations can be checked in real time without performance degradation
Our datacom and storage solutions provide hardware offload capabilities that are an ideal complement to the capabilities of costlyapplication processors. Using application processors to perform tasks such as encrypting data or inspecting packets rather than executingapplication software is very inefficient. The result is higher operating costs and the need for additional, expensive hardware – as well as datacenter floor space to install it, the capability to cool it, and the headcount to manage it. A dedicated Exar device can perform encryption severaltimes faster than two fully dedicated quad core, multi-threaded server microprocessors at approximately 2% of the power. This is just oneexample of the value hardware offload can provide in an enterprise environment.
We provide a variety of solutions to help manage the growing requirements placed on the network and storage infrastructure found inmany organizations. These solutions provide the capability to minimize the data footprint with compression, secure data with encryption andeliminate redundancy with deduplication. Our product portfolio is targeted at resolving these issues with a range of innovative solutions:
• Data Security and Compression—Our line of ASIC and PCI-Express add-in card solutions provide a range of functionalitynecessary for data encryption/authentication and data compression. These hardware solutions are supported by a comprehensivesoftware suite to enable rapid time-to-market. The flexibility of these products enables high performance, low power solutions forboth data-at-rest in storage environments as well as data-in-motion in networking applications. All of these solutions are engineeredfor end-to-end data integrity critical for protecting user data.
• Data Deduplication—Our BitWackr™ product provides a comprehensive solution for in-line data deduplication for primary andbackup storage applications. These solutions offload the computationally intensive tasks necessary from the host processor to allowhigh performance, power efficient implementations of the data deduplication function as well as enabling data to be simultaneouslycompressed and encrypted for storage.
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Communications
Our communications products group designs, develops and markets high performance products for the transmission of digital datathrough global service provider networks. Conforming to international standards for the copper, fiber optic and wireless protocols, our broadportfolio of PDH, SONET, SDH and OTN products enable the delivery of highly reliable, value added communication services.
T/E Carrier
Service providers have a large investment in their existing copper infrastructure. This infrastructure remains a cost effective means ofproviding high value leased line and data services for enterprises, mobile backhaul and network interconnection. We offer a comprehensiveportfolio of T1 and E1 devices for twisted pair copper and DS3 and E3 devices for coaxial copper connections. Our broad range of T1/E1devices includes short-haul and long-haul Line Interface Units (“LIUs”) and LIU/framer combinations that incorporate reconfigurable,relayless redundancy (Exar R Technology™) with integrated termination resistors and jitter attenuation. Used individually or in chip sets, ourT1/E1 technologies offer customers key advantages including design flexibility, enhanced system reliability and standards compliance, whichare critical components of high-density, low-power system boards and line-cards. In addition, our T1/E1/J1 Framer/LIU combination productssimplify the design process by saving board space and by reducing complexity as a result of lowering component count. In addition to T1/E1solutions, we have developed a diverse portfolio of single- and multi-channel T3/E3 physical interface solutions with integrated LIU logic andjitter attenuation that achieve high performance levels while reducing board space and overall power in multi-port applications.
SONET/SDH
Synchronous Optical NETwork (“SONET”) and Synchronous Digital Hierarchy (“SDH”) protocols are the backbone of today’s high-capacity, long distance communications networks. Our portfolio of SONET/SDH products process data at speeds from 155Mb/s to 40Gb/sfor the efficient transport of digital data over fiber optic networks. Products include mixed signal clock and data recovery (“CDR”) circuits,transceivers, protocol framers and service mappers. Our high density, high-integration products enable significant flexibility in line card designcoupled with cost, area and power savings.
OTN
With the substantial growth of internet, wireless and broadband traffic, the demands on service providers for faster, high bandwidth andmore reliable networks for ubiquitous services resulted in the development of the Optical Transport Networks (“OTN”) protocol. Optimizedfor long distance transmission of data at speeds starting at 2.5 Gb/s and exceeding 100 Gb/s, OTN has been accepted as the global technologyfor the next generation of optical networks. We are developing a portfolio of products optimized for the efficient mapping of Ethernet,SONET/SDH, OTN, video, storage and data services over high capacity OTN networks. These multiservice products enable flexible, lowpower, any service, any port line cards.
Carrier Ethernet Services
The exponential increase of internet traffic within service provider networks has created a need for products to efficiently map internetdata onto the existing PDH and SONET/SDH digital networks and evolving OTN network. As the ubiquitous interface for internet and datatraffic in general, Ethernet mappers are key components for the transformation of the network from circuit based to packet based transport.Our extensive portfolio of Ethernet over PDH (“EoPDH”), Ethernet over SONET/SDH (“EoS”) and Ethernet over OTN products enable theefficient mapping of Ethernet packets into flexible bandwidth transport networks.
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Interface
As a market leader, we offer the broadest line of industry-proven Universal Asynchronous Receiver/Transmitter (“UART”) solutions aswell as synergistic serial transceiver devices for use in pervasive applications in industrial, telecommunications and consumer markets. Typicalapplications served by our serial communications products include point-of-sales (“POS”), process control, factory automation as well asservers, embedded systems, routers, network management equipment, remote access servers, wireless base-stations and repeaters.Additionally, our single and multi-channel UARTs are used in portable consumer applications such as multi-media, global positioning system(“GPS”), personal digital assistant (“PDA”) and smart phone devices.
Our UART product portfolio ranges from cost-effective industry-standard devices to high-performance multi-channel UARTs with abroad range of first in, first out (“FIFO”) depths and industry leading performance and features while supporting popular central processingunit (“CPU”) bus interfaces such as 8-bit Industry Standard Architecture (“ISA”), 8-bit VLIO, 2-wire Inter-Integrate Circuit (“I C”), 4-wireSerial Peripheral Interface (“SPI”), Peripheral Component Interconnect (“PCI”), Peripheral Component Interconnect Express (“PCIe”) andUniversal Serial Bus (“USB”). In addition, we were first to market with a wireless UART solution that includes a high-performance UART,controller and Radio Frequency (“RF”) functionality along with our proprietary firmware that enables the application to send and receive datawirelessly over a secure proprietary protocol.
Our serial transceiver solutions consist of Recommended Standard (“RS”)-232, RS-485, RS-422 and multiprotocol devices that ensurereliable connectivity between computing devices. Our RS-232, RS-485 and RS-422 transceivers comply with international standards indelivering multi-channel digital signals between two systems. Our proprietary multiprotocol transceivers enable network equipment tocommunicate with a large population of peripherals that use a diverse set of serial protocol standards without the added burden of multipleadd-on boards and cables.
Our interface product strategy is to continue to enhance the product portfolio with higher speed, lower power and higher functionalitydevices that meet or exceed the growing demands of the serial communications market. We intend to grow our interface product business byproviding increased integration and value through the introduction of additional UART and serial transceiver devices as well as bridgingproducts for popular and growing bus interfaces such as USB, PCIe and Ethernet, among others.
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Power Management
The power management market is a large and diverse semiconductor segment that spans a broad range of technologies. We havedeveloped solutions for DC/DC voltage conversion and supervision designed to meet the needs of industrial, communication and computersystems as well as other electronic devices.
Power , our line of programmable power management products, provides system designers with the ability to reconfigure the powermanagement sub-system throughout the development cycle and, if required, even in the field. By using Power technology, productdevelopment cycles can be reduced from many months to several weeks with the flexibility and configurability of this programmable solution.We are at the forefront of the industry in providing the high performance and cost effective programmable power solutions that make thischange in product development methodology possible.
The Power Delivery System
Power products utilize proprietary technology that has evolved from our previous acquisitions of Sipex and FyreStorm, a collaborativedevelopment partnership with the University of Toronto and our internal engineering team. Power technology combines digital control andmonitoring with our high performance analog circuitry, enabling the system architect to design products that reduce wasted energy by ordersof magnitude and are reconfigurable on the fly. This allows the designer to easily manage product changes and perform true what-if analysis.Our proprietary technology enables efficient partitioning of the digital and analog circuitry within the IC, creating the ability to tailor productsto match the application requirements in a fraction of the area required by other non-configurable technologies.
Power management products, whether digitally controlled or analog, require world class analog process capability and design tools andmethodologies to win in today’s markets. As a fabless semiconductor manufacturer, we have access to the broad range of wafer fabricationfacilities that are driving innovation in analog process technology and have developed strong relationships with the world’s leading suppliersof analog and mixed-signal silicon. This access to leading edge process technology coupled with our ongoing investment in analog and mixed-signal design automation tools has made us competitive with the world’s leading manufacturers of analog power management products.
While we believe our programmable power products represent a fundamental change in the capability of power management devices,many of today’s products are better served by traditional analog power components. For these applications, we have a full line of non-programmable power products which utilize the same state-of-the-art analog circuitry and design tools as found in Power products. Ourportfolio of power products is focused on a range of solutions that offer power management, voltage conversion and LED control. In eacharea, we have delivered products that offer differentiating capabilities based on innovative circuit design and integration. We have built uponour strong heritage of analog and mixed-signal capability with the addition of proprietary technology, enabling the creation of world classproducts that will continue to evolve as our customers’ requirements become ever more complex. This differentiated, proprietary portfolio ofpower products
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has been developed with the goal to make power system design easy. In doing so, we seek to lower the cost and labor burden on ourcustomers so that they do not need to become “power experts.” We enable them to focus on resolving their higher level system relatedchallenges.
Strategy
We strive to be a leading provider of highly differentiated silicon, software and subsystem solutions for industrial, telecom, networkingand storage applications. To achieve our long-term business objectives, we employ the following strategies:
Leverage Analog and Mixed-Signal Design Expertise to Provide Integrated System-Level Solutions—Utilizing our analog and mixed-signal design expertise, we integrate mixed-signal physical interface devices for a broad range of silicon solutions. This capability continues tobe the backbone of our integration strategy and enables us to offer optimized solutions to the markets we serve. Our customers depend onanalog and mixed-signal integration for power reduction, size optimization and signal integrity.
Expand Product Portfolio—We have developed a strong presence in the broad industrial, telecom, networking and storage marketswhere we have industry leading customers and proven technological capabilities. Our design expertise has enabled us to offer a diverseportfolio of both industry standard and proprietary products serving a range of connectivity and power management needs. Our extensiveproduct portfolio provides the framework for customers to work with many of our products on a single board design. Our ability to serve thevarious needs of a customer’s system enables us to meet procurement and support needs by providing a single point of contact for applicationssupport and supply chain management while reducing their number of vendors.
Grow Market Share with System Solutions—We create systems solutions by coupling system expertise, software and advanced siliconintegration to provide an optimized solution that is designed to be technically compelling and cost effective, resulting in distinctive productslike Tethys™, 10G Sonet Multiplexer (“Mux”)/DeMux, DX1700 and DX1800 Cards, Bitwackr data deduplication solutions and Power .These solutions and others provide platform-level engagements that involve software and hardware integration, resulting in a cohesive bondwith customers.
Strengthen and Expand Strategic OEM Relationships—To promote the early adoption of our solutions, we actively seek collaborativerelationships with strategic OEMs during product development. We believe that OEMs recognize the value of our early involvement becausedesigning their system products in parallel with our development can accelerate time-to-market for their end products. Collaborativerelationships also help us to obtain early design wins and to increase the likelihood of market acceptance of our new products, while giving usthe advantage of being the incumbent device provider on future generations of our customers’ platforms.
Use Standard CMOS and Bipolar CMOS-DMOS (“BCD”) Process Technologies to Provide Compelling Price/PerformanceSolutions—We design our products to be manufactured using standard CMOS and BCD processes. We believe that these processes areproven, stable and predictable and benefit from the extensive semiconductor-manufacturing infrastructure devoted to CMOS and BCDprocesses. In certain specialized cases, we may use other process technologies to take advantage of their performance characteristics.
Employ Fabless Semiconductor Model—We have long-standing relationships with third-party wafer foundries and assembly and testsubcontractors to manufacture our ICs. Our fabless approach allows us to avoid substantial capital spending, obtain competitive pricing,minimize the negative effects of industry cycles, reduce time-to-market, reduce technology and product risks, and facilitate the migration of ourproducts to new CMOS and BCD process technologies. By employing the fabless model, we can focus on our core competencies in productdesign, development and support as well as on sales and marketing.
Broaden Sales Coverage with Channel Partners—We have strong relationships with our distributors, catalog firms and salesrepresentatives throughout the world representing a significant portion of our total
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revenue. Through our partners, we have access to large market segments that we cannot directly support. Through these relationships, weextend our expertise and product exposure by enabling our partners to discover new demands for our solutions as well as aid us in definingour next generation solutions.
Expand our Business Through Strategic Commercial Transactions—The markets in which we compete require a wide variety oftechnologies, products and capabilities. The combination of technological complexity and rapid change within our markets makes it difficultfor a single company to develop all the solutions that it desires to offer within its family of products. Through acquisitions, we aim to deliver abroader range of products to customers in target markets. We employ the following strategies to address the need for new or enhancedproducts: we develop new technologies and products internally; we acquire field proven third-party intellectual property cores to acceleratetime to market; and we acquire all or parts of other companies.
Sales and Customers
We market our products globally through both direct and indirect channels. In the United States, we are represented by 19 independentsales representatives and two independent, non-exclusive primary distributors, as well as our own direct sales organization. In addition, we arerepresented by three catalog distributors. We currently have domestic presences in or near Boston, Massachusetts; Chicago, Illinois; Dallas,Texas; Raleigh, North Carolina and Fremont, California.
Internationally, we are represented in Canada, Europe and Asia by our wholly-owned foreign subsidiaries and international supportoffices in Canada, China, France, Germany, Italy, Japan, Singapore, South Korea, Taiwan and the United Kingdom. In addition to theseoffices, approximately 37 independent sales representatives and other independent, non-exclusive distributors represent us. Informationregarding the percentage of our net sales represented by certain geographies is as follows:
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
United States 22% 26% 25% China 34% 35% 24% Singapore 10% 11% 13% Japan 6% 5% 6% Germany 9% 1% 3% Europe (excluding Germany) 7% 13% 19% Rest of world 12% 9% 10% Total net sales 100% 100% 100%
We expect international sales to continue to be a significant portion of our net sales in the future. All of our sales to foreign entities aredenominated in U.S. dollars. For a detailed description of our sales by geographic regions, see Part II, Item 7—“Management’s Discussionand Analysis of Financial Condition and Results of Operations, Net Sales by Geography” and Part II, Item 8—“Notes to ConsolidatedFinancial Statement, Note 19—Segment and Geographic Information.” For a discussion of the risk factors associated with our foreignoperations, see Part I, Item 1A—“Risk Factors—‘Our engagement with foreign customers could cause fluctuations in our operating results,which could materially and adversely impact our business, financial condition and results of operations’.”
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We sell our products to distributors and OEMs (or their designated subcontract manufacturers) throughout the world. No OEMcustomer accounted for 10% or more of our net sales in fiscal year 2011, 2010 or 2009. The following distributor accounted for over 10% ofour net sales in the fiscal years indicated:
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Future Electronics Inc. (“Future”) 30% 28% 35%
No other distributor accounted for 10% or more of our net sales in fiscal year 2011, 2010 or 2009.
We work directly with many key customers including, among others, Alcatel-Lucent, Cisco Systems Inc., Delta, EchoStar Corporation,EMC Corporation, Ericsson Inc., Fujitsu Limited, Hewlett-Packard Company, Huawei Technologies Co., Ltd., IBM Corporation, LGElectronics Inc., NEC Corporation, Nokia Siemens Networks, Pace, Panasonic Corporation, Parrot SA, Samsung Electronics Co. Ltd,Tellabs, Inc., United Telecom, and ZTE Corporation.
Manufacturing
We outsource all of our fabrication and assembly as well as the majority of our testing operations. This fabless manufacturing modelallows us to focus on product design, development and support as well as on sales and marketing.
Our products are manufactured using standard CMOS, bipolar, BiCMOS (bipolar CMOS) and BCD process technologies. We usewafer foundries located in the United States and Asia to manufacture our semiconductor wafers.
Most of our semiconductor wafers are shipped directly from our foundries to our subcontractors in Asia for wafer test and assembly,where the wafers are cut into individual die and packaged. Independent contractors in China, Indonesia, Malaysia and Taiwan perform most ofour assembly work. Final test and quality assurance are performed at our subcontractors’ facilities in Asia or at our Fremont, Californiafacility. All of our primary manufacturing partners are certified to ISO 9001:2000 and are, or we expect soon will be, automotive specificationTL16949 compliant.
We will continue to use the turnkey manufacturing model for our acquired Hifn and Galazar products currently in production, with oursuppliers delivering fully assembled and tested products based on our proprietary designs.
Research and Development
We believe that ongoing innovation and introduction of new products in our targeted and adjacent markets is essential to sustaininggrowth. Our ability to compete depends on our ability to offer technologically innovative products on a timely basis. As performance demandsand the complexity of ICs have increased, the design and development process has become a multi-disciplinary effort requiring diversecompetencies. Our research and development is focused on developing high-performance analog, digital and mixed-signal solutionsaddressing the high-bandwidth requirements of communications and storage systems OEMs and the high-current, high-voltage requirementsof interface and power management OEMs. We make investments in advanced design tools, design automation and high-performanceintellectual property libraries while taking advantage of readily available specialty intellectual property through licensing or purchases. We alsoaugment our skill sets and intellectual property through university collaboration, incorporating talent through acquisition and by accessingneeded skills with off-campus design centers. We continue to pursue the development of design methodologies that are optimized for reducingdesign-cycle time and increasing the likelihood of first-time success. As a result of the Hifn acquisition, we now have a substantive researchand development presence in the People’s Republic
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of China (“PRC”) and have a research and development presence in Canada resulting from our acquisitions of Galazar and Neterion. Weinvested an aggregate of $51.1 million, $48.5 million and $31.8 million on research and development in fiscal years 2011, 2010 and 2009,respectively. For further explanation of our increased expenses in research and development, please see Part II, Item 7—“Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”
Competition
The semiconductor industry is intensely competitive and is characterized by rapid technological change and a history of price reductionsas design improvements and production efficiencies are achieved in successive generations of products. Although the market for analog andmixed-signal ICs is generally characterized by longer product life cycles and less dramatic price reductions than the market for digital ICs, weface substantial competition in each market in which we participate.
We believe that the principal competitive factors in the market segments in which we operate are:
• time-to-market;
• product performance, quality, reliability and features;
• customer support and services;
• price;
• rapid technological change;
• number of design wins released to production;
• lowering total system cost;
• product innovation; and
• compliance with and support of industry standards.
We compete with many other companies and many of our current and potential competitors may have certain advantages over us such as:
• longer presence in key markets;
• greater name recognition;
• stronger financial position and liquidity;
• more secure supply chain;
• access to larger customer bases;
• broader product offerings;
• deeper engagement with customers; and
• significantly greater sales, marketing, development, and other resources.
Because IC markets are highly fragmented, we generally encounter different competitors in our various target markets. Competitors withrespect to our communications products include Applied Micro Circuits Corporation, Integrated Device Technology, Inc., Maxim IntegratedProducts, Inc., Mindspeed Technologies, Inc., PMC-Sierra, Inc., TranSwitch Corporation and Vitesse Semiconductor Corporation.Competitors in the datacom and storage market include Cavium Networks, Netlogic Microsystems, Inc. and Comtech TelecommunicationsCorp. Competitors in the interface market include NXP B.V., Texas Instruments Incorporated, Analog Devices, Inc., Intersil Corporation,Linear Technology Corporation and Maxim Integrated Products, Inc. Our primary competitors with respect to our power products includeAdvanced Analogic
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Technologies Incorporated, Analog Devices, Inc., Intersil Corporation, Linear Technology Corporation, Maxim Integrated Products, Inc.,Micrel Incorporated, National Semiconductor Corporation, On Semiconductor Corporation, Pioneer Corporation, Semtech Corporation, SharpElectronics Corporation, Sony Corporation and Texas Instruments Incorporated. See Part I, Item 1A—“Risk Factors—‘If we are unable tocompete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross marginsand lost market share.’”
Backlog
Our sales are made pursuant to either purchase orders for current delivery of standard items or agreements covering purchases over aperiod of time, which are frequently subject to revisions and, to a lesser extent, cancellations with little or no penalties. Lead times for therelease of purchase orders depend on the scheduling practices of the individual customer, and our rate of bookings varies from month-to-month. Certain distributors’ agreements allow for stock rotations, scrap allowances and volume discounts. Further, we defer recognition ofrevenue on shipments to certain distributors until the product is resold. For all of these reasons, we believe backlog as of any particular dateshould not be used as a predictor of future sales.
Intellectual Property Rights
To protect our intellectual property, we rely on a combination of patents, mask work registrations, trademarks, copyrights, trade secrets,and employee and third-party nondisclosure agreements. As of March 27, 2011, we have 211 patents issued and 30 patent applicationspending in the United States and 79 patents issued and 162 patent applications pending in various foreign countries. Our existing patents willexpire between 2012 and 2030, or sooner if we choose not to pay renewal fees. We may also enter into license agreements or other agreementsto gain access to externally developed products or technologies. While our intellectual property is critically important, we do not believe thatour current or future success is materially dependent upon any one patent.
Despite our protection efforts, we may fail to adequately protect our intellectual property. Others may gain access to our trade secrets ordisclose such trade secrets to third parties without our knowledge. Some or all of our pending and future patent applications may not result inissued patents that provide us with a competitive advantage. Even if issued, such patents, as well as our existing patents, may be challengedand later determined to be invalid or unenforceable. Others may develop similar or superior products without access to or without infringingupon our intellectual property, including intellectual property that is protected by trade secret and patent rights. In addition, the laws of certainterritories in which our products are or may be developed, manufactured or sold, including Asia, Europe, the Middle East and Latin America,may not protect our products and intellectual property rights to the same extent as the laws of the United States of America.
We cannot be sure that our products or technologies do not infringe patents that may be granted in the future pursuant to pending patentapplications or that our products do not infringe any patents or proprietary rights of third parties. Occasionally, we are informed by thirdparties of alleged patent infringement. In the event that any relevant claims of third-party patents are found to be valid and enforceable, we maybe required to:
• stop selling, incorporating or using our products that use the infringed intellectual property;
• obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, although such licensemay not be available on commercially reasonable terms, if at all; or
• redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible ormeet customer requirements.
If we are required to take any of the actions described above or defend against any claims from third parties, our business, financialcondition and results of operations could be harmed. See Part I, Item 1A—“Risk Factors—‘We may be unable to protect our intellectualproperty rights, which could harm our competitive position’ and ‘We could be required to pay substantial damages or could be subject tovarious equitable remedies if it were proven that we infringed the intellectual property rights of others.’”
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Employees
As of March 27, 2011, we employed 477 full-time employees, with 247 in research and development, 75 in operations, 85 in marketingand sales and 70 in administration. Of the 477 employees, 173 are located in our international offices. See Part I, Item 1A—“Risk Factors—‘We depend in part on the continued service of our key engineering and management personnel and our ability to identify, hire, incentivizeand retain qualified personnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, our business,financial condition and results of operations could be materially and adversely impacted.’” None of our employees are represented by acollective bargaining agreement, and we have never experienced a work stoppage due to labor issues.
Executive Officers of the Registrant
Our executive officers and their ages as of May 27, 2011, are as follows:
Name Age Position
Pedro (Pete) P. Rodriguez 49 Chief Executive Officer, President and DirectorGeorge Apostol 46 Executive Vice President, Engineering and Operations and Chief Technology OfficerKevin Bauer 51 Vice President and Chief Financial OfficerChris Dingley 51 Executive Vice President of Worldwide SalesDiane Hill 54 Vice President, Human ResourcesFrank Marazita 55 Senior Vice President of Worldwide Operations and Reliability & Quality AssuranceThomas R. Melendrez 57 General Counsel, Secretary and Executive Vice President of Business DevelopmentPaul Pickering 51 Executive Vice President of MarketingTrong Vu 58 Chief Information Officer and Vice President of Information TechnologyJiebing Wang 43 Vice President of Central Engineering and General Manager, China Development Center
Pedro (Pete) P. Rodriguez was appointed our Chief Executive Officer and President in April 2008. He has served as our director sinceOctober 2005. Mr. Rodriguez has over 25 years of engineering, sales, marketing and executive management experience in the semiconductorindustry. Mr. Rodriguez served, most recently, from June 2007 to April 2008, as Chief Marketing Officer of Virage Logic Corporation, asemiconductor intellectual property supplier for Systems on a Chip (“SoC”). Prior to his appointment at Virage Logic, Mr. Rodriguez servedas President, Chief Executive Officer and Director of Xpedion Design Systems, Inc., a private, venture-funded developer of design solutionsfor Radio Frequency Integrated Circuits (“RFIC”), from May 2000 to August 2006. Mr. Rodriguez held this role for six years until shortlyafter Xpedion was acquired by Agilent Technologies, Inc. in 2006. Prior to Xpedion, he held various senior management positions in salesand marketing at Escalade Corporation, a provider of software for chip design, and LSI Corporation (formerly LSI Logic Corporation), aswell as design engineering, product management and process engineering positions at Aerojet Electronics, Teledyne Microwave and SiliconixIncorporated. Mr. Rodriguez holds an MBA from Pepperdine University, an MSEE from California Polytechnic University and a BS inChemical Engineering from California Institute of Technology.
George Apostol was appointed our Executive Vice President, Engineering and Operations and Chief Technology Officer in March2010. Prior to his appointment he was our Chief Technology Officer from May 2008 to February 2010. Mr. Apostol has over 20 years ofexperience in the systems electronics and semiconductor industries. From May 2005 to May 2008, Mr. Apostol served as Chief TechnologyOfficer and Vice President of Engineering at PLX Technology, Inc., an integrated circuits company. Prior to that, Mr. Apostol was VicePresident of Engineering at Audience, Inc., a supplier of audio software and semiconductor systems, from May 2004 to May 2005 and VicePresident of Engineering at Brecis
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Communications Corporation, the inventor of the popular Multi-service Processor (MSP), from February 2000 to April 2004. Prior to that, heheld various senior engineering and management positions at TiVo, Inc., LSI Corporation (formerly LSI Logic Corporation), SiliconGraphics, Inc. and Xerox Corporation. With a strong background designing systems on silicon, he holds several patents in the areas of systembus interface, clocking and buffer management design, and has written and deployed multiple Application-Specification Integrated Circuit(“ASIC”) design productivity tools. Mr. Apostol performed his academic research at the Dana Farber Cancer Institute and MassachusettsInstitute of Technology Sloan School of Management and holds a BSEE from Massachusetts Institute of Technology.
Kevin Bauer was appointed our Vice President and Chief Financial Officer in June 2009. Prior to his appointment he was ourCorporate Controller from August 2005 to June 2009 and was promoted to Vice President in December 2008. Before that Mr. Bauer was ourOperations Controller from February 2001 to August 2005. Previously, Mr. Bauer was Operations Controller at WaferTech LLC (a jointventure semiconductor fabrication plant of Taiwan Semiconductor Manufacturing Company Limited, Altera Corporation, Analog Devices,Inc. and Integrated Silicon Solution, Inc.) from July 1997 to February 2001. Prior to WaferTech, he was at VLSI Technology for ten yearswhere he held a variety of increasingly more senior finance roles culminating in his position as Director, Group Controller-CommunicationsGroup. Prior to that he held finance positions at Memorex and Bank of America. Mr. Bauer has over 23 years of finance experience in thesemiconductor industry and received an MBA from Santa Clara University and a BS in Business Administration from California LutheranUniversity.
Chris Dingley was appointed our Executive Vice President of Worldwide Sales in April 2011. Mr. Dingley has over 25 years ofsemiconductor sales experience. Prior to his appointment at Exar, Mr. Dingley was Vice President of Worldwide Sales at Micrel, Inc., amanufacturer of IC solutions for analog, Ethernet and high bandwidth markets, from July 1997 to April 2011. During his 14 years withMicrel, Mr. Dingley held several additional positions including Director of West Sales and Global Accounts, and Director of WorldwideChannel Sales. Prior to joining Micrel, Mr. Dingley was Distribution Manager for Winbond North America, a supplier of memory ICs, fromJune 1996 to June 1997. Prior to Winbond, Mr. Dingley held the positions of Area Sales Manager and Distribution Sales Manager withGeneral Instrument from August 1987 to June 1996. Mr. Dingley studied Marketing and Electrical Engineering Technology at Arizona StateUniversity.
Diane Hill was appointed our Vice President, Human Resources in April 2010. With over 25 years of human resources experience,including 17 in the semiconductor industry, Ms. Hill is responsible for developing and implementing all global and regional human resourcespolicies and programs at Exar. Since joining us in September 2000, Ms. Hill has held various senior Human Resources positions prior to hercurrent role, including Division Vice President, Director and Senior Manager. Previously, Ms. Hill held various management positions atDaisy Systems Corporation, a manufacturer of computer hardware and software for electronic design automation (EDA), from October 1987to April 1990 and Teledyne MEC, a subsidiary of Teledyne Technologies, Inc., from August 1979 to October 1987. Ms. Hill holds a BA inPsychology from the University of California at Santa Barbara.
Frank Marazita joined us in March 2010 as our Senior Vice President of Worldwide Operations and Reliability & Quality Assurance.Mr. Marazita has over 30 years of experience in semiconductor manufacturing and his company experience ranges from new startups to wellestablished entities giving him a broad range of skills. Prior to joining us, Mr. Marazita was owner and General Manager for Special-OpsConsulting, a consulting company, from March 2009 to March 2010. Prior to Special-Ops Consulting, Mr. Marazita was Vice President ofWorldwide Operations and Finance at Analogix Semiconductor, a privately held fabless semiconductor company, from November 2005 toMarch 2009. Prior to Analogix, Mr. Marazita held the role of Vice President of Manufacturing and Operations at Brecis CommunicationsCorporation from 2000 to 2005. Prior appointments include Vice President Operations for ATI Technology, HOTRAIL, and ExponentialTechnology. Additionally Mr. Marazita has held senior Engineering Management Roles at Sun Microsystems, Inc. and NationalSemiconductor Corporation. Mr. Marazita has been issued seven semiconductor patents and holds a BSEE from Michigan State University.
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Thomas R. Melendrez joined us in April 1986 as our Corporate Attorney. He was promoted to Director, Legal Affairs in July 1991,and again to Corporate Vice President, Legal Affairs in March 1993. In March 1996, he was promoted to Corporate Vice President, GeneralCounsel and in June 2001, he was appointed Secretary. In April 2003, he was promoted to General Counsel, Secretary and Vice President ofBusiness Development and in July 2005, he was promoted to Senior Vice President of Business Development. In April 2007, he waspromoted to his current position as General Counsel, Secretary and Executive Vice President of Business Development. Mr. Melendrez hasover 25 years of legal experience in the semiconductor and related industries and he received a BA from the University of Notre Dame, a JDfrom University of San Francisco and an MBA from Pepperdine University.
Paul Pickering was appointed our Executive Vice President of Marketing in March 2011. Prior to this appointment, he was ourExecutive Vice President of Sales and Marketing from March 2010 to March 2011 and our Senior Vice President of Marketing from June2008 to February 2010. Mr. Pickering has over 28 years of semiconductor marketing and sales experience. Prior to joining us, Mr. Pickeringwas the Vice President of Field Operations for Innovative Silicon, a venture-capital funded company that developed a pioneering memory—Z-RAM —technology for stand-alone DRAM and embedded memory applications, from March 2007 to June 2008. Prior to Innovative Silicon,Mr. Pickering was executive vice-president of sales and marketing of Xpedion Design Systems, Inc., a private, venture-funded developer ofdesign solutions for RFIC acquired by Agilent Technologies, Inc. in 2006, from May 2003 to March 2007. Prior to this position,Mr. Pickering worked in senior management sales and marketing roles at Fairchild Semiconductor, Inc., Toshiba America, Inc., LSICorporation (formerly LSI Logic Corporation), and PMC-Sierra, Inc. Mr. Pickering received a BS in Social Science from the West ChesterUniversity of Pennsylvania.
Trong Vu joined us in October 2007 as our Chief Information Officer and Vice President of Information Technology. Mr. Vu has over25 years of experience with leading semiconductor companies. Prior to joining us, Mr. Vu was founder, CIO and Information Systemsconsultant of EGIS Systems Inc., a network security company, from April 2002 to October 2007. Prior to EGIS Systems Inc., Mr. Vu heldthe role of Vice President of Information Technology at Mattson Technology Inc., a designer and manufacturer of semiconductor waferprocessing equipment, from 2000 to 2002. Additionally Mr. Vu was Director of IT at LSI Logic and National Semiconductor Corporationfrom 1981 to 2000. Mr. Vu has a broad background in system integration as well as developing enterprise software. Mr. Vu has also beeninvolved in building computer centers and infrastructure needed for companies to effectively run their worldwide information systems. Mr. Vureceived his Bachelor of Information System Management degree from University of San Francisco.
Jiebing Wang was appointed our Vice President of Central Engineering and General Manager, China Development Center in March2011. Dr. Wang initially joined us in April 2009 as our Vice President of Acceleration Technology and General Manager, China DevelopmentCenter after the completion of our acquisition of Hifn. Dr. Wang joined Hifn in March 2004 as President of Hifn’s China Operations based inHangzhou and was promoted to Vice President of Worldwide Engineering and General Manager of Hifn’s China Product Operations inMarch 2007. Before joining Hifn, Dr. Wang was a founder and CTO of Hangzhou C-Sky Microsystems from 2002 to 2004, where he led thedevelopment of a high performance 32-bit embedded CPU. Dr. Wang has held technical positions with Nishan Systems, PhilipsSemiconductors and Toshiba America from 1998 to 2002. Dr. Wang has extensive technical experiences in the area of networking, securityand embedded systems. Dr. Wang earned his Ph.D. in physics from the University of Nevada, and a master’s degree in electrical engineeringfrom Stanford University.
Available Information
We file electronically with the Securities and Exchange Commission (“SEC”) our Annual Reports on Form 10-K, Quarterly Reports onForm 10-Q, current Reports on Form 8-K, and amendments to those Reports pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934. Those reports and statements: (1) may be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC20549, (2) are available at the SEC’s Internet site (http://www.sec.gov), which contains reports, proxy and information
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statements and other information regarding issuers that file electronically with the SEC; and (3) are available free of charge through ourwebsite (www.exar.com) as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC. Information regarding theoperation of the SEC’s public reference room may be obtained by calling the SEC at 1-800-SEC-0330. Copies of such documents may berequested by contacting our Investor Relations Department at (510) 668-7201 or by sending an e-mail through the Investor Relations page onour website. Information on our website is not incorporated by reference into this Report. ITEM 1A. RISK FACTORS
Global capital, credit market, employment, and general economic conditions, and resulting declines in consumer confidence andspending, could have a material adverse effect on our business, operating results and financial condition.
Periodic declines or fluctuations in the U.S. dollar, corporate results of operations, interest rates, inflation or deflation, the global impactof sovereign debt, economic trends, actual or feared economic recessions, lower spending, the impact of conflicts throughout the world,terrorist acts, natural disasters (such as the recent earthquake and tsunami in Japan), volatile energy costs, the outbreak of communicablediseases and other geopolitical factors, have had, and may continue to have, a negative impact on the U.S. and global economies. Volatility anddisruption in the global capital and credit markets have led to a tightening of business credit and liquidity, a contraction of consumer credit,business failures, higher unemployment, and declines in consumer confidence and spending in the U.S. and internationally. If global economicand financial market conditions deteriorate or remain weak for an extended period of time, many related factors could have a material adverseeffect on our business, operating results, and financial condition, including the following:
• slower spending by consumers and market fluctuations may result in reduced demand for our products, reduced orders for ourproducts, order cancellations, lower revenues, increased inventories, and lower gross margins;
• if we undertake restructuring activities due to economic pressure, we cannot guarantee that any of our restructuring efforts will be
successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous or future restructuringplans, in addition, if we reduce our workforce, it may adversely impact our ability to respond rapidly to new growth opportunities;
• we may be unable to predict the strength or duration of market conditions or the effects of consolidation of our customers in theirindustries, which may result in project delays or cancellations;
• we may be unable to find suitable investments that are safe or liquid, or that provide a reasonable return resulting in lower interest
income or longer investment horizons, and disruptions to capital markets or the banking system may also impair the value ofinvestments or bank deposits we currently consider safe or liquid;
• the failure of financial institution counterparties to honor their obligations to us under credit instruments could jeopardize our ability to
rely on and benefit from those instruments, and our ability to replace those instruments on the same or similar terms may be limitedunder poor market conditions;
• continued volatility in the markets and prices for commodities, such as gold, and raw materials we use in our products and in oursupply chain could have a material adverse effect on our costs, gross margins, and profitability;
• if distributors of our products experience declining revenues, or experience difficulty obtaining financing in the capital and creditmarkets to purchase our products, or experience severe financial difficulty, it could result in insolvency, reduced orders for ourproducts, order cancellations, inability to timely meet payment obligations to us, extended payment terms, higher accounts receivable,reduced cash flows, greater expenses associated with collection efforts, and increased bad debt expenses;
• if contract manufacturers or foundries of our products or other participants in our supply chain experience difficulty obtaining
financing in the capital and credit markets to purchase raw materials or to finance general working capital needs, it may result in delaysor non-delivery of shipments of our products;
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• potential shutdowns or over capacity constraints by our third-party foundries or assembly and test subcontractors could result inlonger lead-times, higher buffer inventory levels and degraded on-time delivery performance; and
• the current macroeconomic environment also limits our visibility into future purchases by our customers and renewals of existingagreements, which may necessitate changes to our business model.
Our financial results may fluctuate significantly because of a number of factors, many of which are beyond our control.
Our financial results may fluctuate significantly as a result of a number of factors, many of which are difficult or impossible to control orpredict, which include:
• the continuing effects of the recent economic downturn;
• the cyclical nature of the semiconductor industry;
• difficulty in predicting revenues and ordering the correct mix of products from suppliers due to limited visibility provided bycustomers and channel partners;
• changes in the mix of product sales as our margins vary by product;
• fluctuations in the capitalization of unabsorbed fixed manufacturing costs;
• the impact of our revenue recognition policies on reported results; and
• the reduction, rescheduling, cancellation or timing of orders by our customers, distributors and channel partners due to, among others,the following factors:
• management of customer, subcontractor and/or channel inventory;
• delays in shipments from our subcontractors causing supply shortages;
• inability of our subcontractors to provide quality products, in adequate quantities and in a timely manner;
• dependency on a single product with a single customer and/or distributor;
• volatility of demand for equipment sold by our large customers, which in turn, introduces demand volatility for our products;
• disruption in customer demand as customers change or modify their complex subcontract manufacturing supply chain;
• disruption in customer demand due to technical or quality issues with our devices or components in their system;
• the inability of our customers to obtain components from their other suppliers;
• disruption in sales or distribution channels;
• our ability to maintain and expand distributor relationships;
• changes in sales and implementation cycles for our products;
• the ability of our suppliers and customers to remain solvent, obtain financing or fund capital expenditures as a result of the recentglobal economic slowdown;
• risks associated with entering new markets;
• the announcement or introduction of products by our existing competitors or new competitors;
• loss of market share by our customers;
• competitive pressures on selling prices or product availability;
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• pressures on selling prices overseas due to foreign currency exchange fluctuations;
• erosion of average selling prices coupled with the inability to sell newer products with higher average selling prices, resulting in loweroverall revenue and margins;
• delays in product design releases;
• market and/or customer acceptance of our products;
• changes in our customers’ end user concentration or requirements;
• loss of one or more major customers;
• significant changes in ordering pattern by major customers;
• our or our channel partners’ ability to maintain and manage appropriate inventory levels;
• the availability and cost of materials and services, including foundry, assembly and test capacity, needed by us from our foundries andother manufacturing suppliers;
• disruptions in our or our customers’ supply chain due to natural disasters, fire, outbreak of communicable diseases, labor disputes,civil unrest or other reasons;
• delays in successful transfer of manufacturing processes to our subcontractors;
• fluctuations in the manufacturing output, yields, and capacity of our suppliers;
• fluctuation in suppliers’ capacity due to reorganization, relocation or shift in business focus, financial constraints, or other reasons;
• problems, costs, or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higherlevels of design and device integration;
• our ability to successfully introduce and transfer into production new products and/or integrate new technologies;
• increased manufacturing costs;
• higher mask tooling costs associated with advanced technologies; and
• the amount and timing of our investment in research and development;
• costs and business disruptions associated with stockholder or regulatory issues;
• the timing and amount of employer payroll tax to be paid on our employees’ gains on exercise of stock options;
• an inability to generate profits to utilize net operating losses;
• increased costs and time associated with compliance with new accounting rules or new regulatory requirements;
• changes in accounting or other regulatory rules, such as the requirement to record assets and liabilities at fair value;
• write-offs of some or all of our goodwill and other intangible assets;
• fluctuations in interest rates and/or market values of our marketable securities;
• litigation costs associated with the defense of suits brought or complaints made against us; and
• changes in or continuation of certain tax provisions.
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Our expense levels are based, in part, on expectations of future revenues and are, to a large extent, fixed in the short-term. Our revenuesare difficult to predict and at times we have failed to achieve revenue expectations. We may be unable to adjust spending in a timely manner tocompensate for any unexpected revenue shortfall. If revenue levels are below expectations for any reason, our business, financial conditionand results of operations could be materially and adversely impacted.
As of March 27, 2011, Soros Fund Management LLC, as principal investment manager for Quantum Partners LP (“Soros”),beneficially owned approximately 15% of our common stock, and affiliates of Future, Alonim Investments Inc. and two of its affiliates(collectively “Alonim”), beneficially owned approximately 17% of our common stock. As such, Alonim and Soros are our largeststockholders. These substantial ownership positions enable Alonim and Soros to significantly influence matters requiring stockholderapproval, which may or may not be in our best interests or the interest of our other stockholders. In addition, Alonim is an affiliate ofFuture and an executive officer of Future is on our board of directors, which could lead to actual or perceived influence from Future.
Alonim and Soros each own a significant percentage of our outstanding shares. Due to such ownership, Alonim and Soros, actingindependently or jointly, may be able to exert strong influence over actions requiring the approval of our stockholders, including the election ofdirectors, many types of change of control transactions and amendments to our charter documents. Further, if one of these stockholders wereto sell or even propose to sell a large number of their shares, the market price of our common stock could decline significantly.
Although we have no reason to believe it to be the case, the interests of these significant stockholders could conflict with our bestinterests or the interests of the other stockholders. For example, the significant ownership percentages of these two stockholders could havethe effect of delaying or preventing a change of control or otherwise discouraging a potential acquirer from obtaining control of us, regardlessof whether the change of control is supported by us and our other stockholders. Conversely, by virtue of their percentage ownership of ourstock, Alonim and/or Soros could facilitate a takeover transaction that our board of directors and/or a significant portion of our otherstockholders did not approve.
Further, Alonim is an affiliate of Future, our largest distributor, and Pierre Guilbault, the chief financial officer of Future, is a member ofour board of directors. These relationships could also result in actual or perceived attempts to influence management to take actions beneficialto Future which may or may not be beneficial to us or in our best interests. Future could attempt to obtain terms and conditions more favorablethan those we would typically provide our distributors because of its relationship with us. Any such actual or perceived preferential treatmentcould materially and adversely affect our business, financial condition and results of operations.
Our fixed operating expenses and practice of ordering materials in anticipation of projected customer demand could make it difficult forus to respond effectively to sudden swings in demand and result in higher than expected costs and excess inventory. Such sudden swingsin demand could therefore have a material adverse impact on our business, financial condition and results of operations.
Our operating expenses are relatively fixed in the short to medium term, and therefore, we have limited ability to reduce expenses quicklyand sufficiently in response to any revenue shortfall. In addition, we typically plan our production and inventory levels based on forecasts ofcustomer demand, which is highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead timesto obtain inventory and materials from our outside suppliers and foundries, we may order materials in advance of anticipated customerdemand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail tomaterialize. This incremental cost could have a materially adverse impact on our business, financial condition and results of operations.
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If we fail to develop, introduce or enhance products that meet evolving market needs or which are necessitated by technological advances,or we are unable to grow revenues, then our business, financial condition and results of operations could be materially and adverselyimpacted.
The markets for our products are characterized by a number of factors, some of which are listed below:
• changing or disruptive technologies;
• evolving and competing industry standards;
• changing customer requirements;
• increasing price pressure;
• increasing product development costs;
• long design-to-production cycles;
• competitive solutions;
• fluctuations in capital equipment spending levels and/or deployment;
• rapid adjustments in customer demand and inventory;
• increasing functional integration;
• moderate to slow growth;
• frequent product introductions and enhancements;
• changing competitive landscape (consolidation, financial viability); and
• finite market windows for product introductions.
Our growth depends in part on our successful continued development and customer acceptance of new products for our core markets.We must: (i) anticipate customer and market requirements and changes in technology and industry standards; (ii) properly define and developnew products on a timely basis; (iii) gain access to and use technologies in a cost-effective manner; (iv) have suppliers produce qualityproducts; (v) continue to expand our technical and design expertise; (vi) introduce and cost-effectively manufacture new products on a timelybasis; (vii) differentiate our products from our competitors’ offerings; and (viii) gain customer acceptance of our products. In addition, wemust continue to have our products designed into our customers’ future products and maintain close working relationships with key customersto define and develop new products that meet their evolving needs. Moreover, we must respond in a rapid and cost-effective manner to shiftsin market demands, to increased functional integration and other changes. Migration from older products to newer products may result involatility of earnings as revenues from older products decline and revenues from newer products begin to grow.
Products for our customers’ applications are subject to continually evolving industry standards and new technologies. Our ability tocompete will depend in part on our ability to identify and ensure compliance with these industry standards. The emergence of new standardscould render our products incompatible. We could be required to invest significant time, effort and expense to develop and qualify newproducts to ensure compliance with industry standards.
The process of developing and supporting new products is complex, expensive and uncertain, and if we fail to accurately predict andunderstand our customers’ changing needs and emerging technological trends, our business, financial condition and results of operations maybe harmed. In addition, we may make significant investments to modify new products according to input from our customers who may choosea competitor’s or an internal solution, or cancel their projects. We may not be able to identify new product opportunities successfully, developand bring to market new products, achieve design wins, ensure when and which design wins actually get
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released to production, or respond effectively to technological changes or product announcements by our competitors. In addition, we may notbe successful in developing or using new technologies or may incorrectly anticipate market demand and develop products that achieve little orno market acceptance. Our pursuit of technological advances may require substantial time and expense and may ultimately prove unsuccessful.Failure in any of these areas may materially and adversely harm our business, financial condition and results of operations.
We have made and in the future may make acquisitions and significant strategic equity investments, which may involve a number ofrisks. If we are unable to address these risks successfully, such acquisitions and investments could have a materially adverse effect onour business, financial condition and results of operations.
We have recently undertaken a number of strategic acquisitions, have made strategic investments in the past, and may make furtherstrategic acquisitions and investments from time to time in the future. The risks involved with these acquisitions and investments include:
• the possibility that we may not receive a favorable return on our investment or incur losses from our investment or the originalinvestment may become impaired;
• revenues or synergies could fall below projections or fail to materialize as assumed;
• failure to satisfy or set effective strategic objectives;
• the opportunity cost associated with committing capital in such transactions;
• the possibility of litigation arising from these transactions;
• our assumption of known or unknown liabilities or other unanticipated events or circumstances; and
• the diversion of management’s attention from day-to-day operations of the business and the resulting potential disruptions to theongoing business.
Additional risks involved with acquisitions include:
• difficulties in integrating and managing various functional areas such as sales, engineering, marketing, and operations;
• difficulties in incorporating or leveraging acquired technologies and intellectual property rights in new products;
• difficulties or delays in the transfer of manufacturing flows and supply chains of products of acquired businesses;
• failure to retain and integrate key personnel;
• failure to retain and maintain relationships with existing customers, distributors, channel partners and other parties;
• failure to manage and operate multiple geographic locations both effectively and efficiently;
• failure to coordinate research and development activities to enhance and develop new products and services in a timely manner thatoptimize the assets and resources of the combined company;
• difficulties in creating uniform standards, controls (including internal control over financial reporting), procedures, policies andinformation systems;
• unexpected capital equipment outlays and continuing expenses related to technical and operational integration;
• difficulties in entering markets or retaining current markets in which we have limited or no direct prior experience and wherecompetitors in such markets may have stronger market positions;
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• insufficient revenues to offset increased expenses associated with acquisitions;
• under-performance problems with an acquired company;
• issuance of common stock that would dilute our current stockholders’ percentage ownership;
• reduction in liquidity and interest income on lower cash balances;
• recording of goodwill and intangible assets that will be subject to periodic impairment testing and potential impairment charges againstour future earnings;
• incurring amortization expenses related to certain intangible assets; and
• incurring large and immediate write-offs of assets.
Strategic equity investments also involve risks associated with third parties managing the funds and the risk of poor strategic choices orexecution of strategic and operating plans.
We may not address these risks successfully without substantial expense, delay or other operational or financial problems, or at all. Anydelays or other such operations or financial problems could materially and adversely impact our business, financial condition and results ofoperations.
If we are unable to convert a significant portion of our design wins into revenue, our business, financial condition and results ofoperations could be materially and adversely impacted.
We continue to secure design wins for new and existing products. Such design wins are necessary for revenue growth. However, manyof our design wins may never generate revenues if their end-customer projects are unsuccessful in the market place or the end-customerterminates the project, which may occur for a variety of reasons. Mergers, consolidations or cost reduction activities among our customersmay lead to termination of certain projects before the associated design win generates revenue. If design wins do generate revenue, the time lagbetween the design win and meaningful revenue is typically between six months to greater than eighteen months. If we fail to convert asignificant portion of our design wins into substantial revenue, our business, financial condition and results of operations could be materiallyand adversely impacted. Under recent deteriorating global economic conditions, our design wins could be delayed even longer than the typicallag period and our eventual revenue could be less than anticipated from products that were introduced within the last eighteen to thirty-sixmonths, which would likely materially and adversely affect our business, financial condition and results of operations.
The complexity of our products may lead to errors, defects and bugs, which could subject us to significant costs or damages andadversely affect market acceptance of our products.
Although we, our customers and our suppliers rigorously test our products, they may contain undetected errors, performanceweaknesses, defects or bugs when first introduced or as new versions are released. If any of our products contain production defects orreliability, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may bereluctant to continue to buy our products, which could adversely affect our ability to retain and attract new customers. In addition, these defectsor bugs could interrupt or delay sales of affected products, which could materially and adversely affect our business, financial condition andresults of operations.
If defects or bugs are discovered after commencement of commercial production, we may be required to make significant expenditures ofcapital and other resources to resolve the problems. This could result in significant additional development costs and the diversion of technicaland other resources from our other development efforts. We could also incur significant costs to repair or replace defective products or mayagree to be liable for certain damages incurred. These costs or damages could have a material adverse effect on our business, financialcondition and results of operations.
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We derive a substantial portion of our revenues from distributors, especially from our two primary distributors, Future Electronics Inc.(“Future”), a related party, and Nu Horizons Electronics Corp. (“Nu Horizons”). Our revenues would likely decline significantly if ourprimary distributors elected not to promote or sell our products or if they elected to cancel, reduce or defer purchases of our products.
Future and Nu Horizons have historically accounted for a significant portion of our revenues, and they are our two primary distributorsworldwide. We anticipate that sales of our products to these distributors will continue to account for a significant portion of our revenues. Theloss of either Future or Nu Horizons as a distributor, for any reason, or a significant reduction in orders from either of them would materiallyand adversely affect our business, financial condition and results of operations.
Sales to Future and Nu Horizons are made under agreements that provide protection against price reduction for their inventory of ourproducts. As such, we could be exposed to significant liability if the inventory value of the products held by Future and Nu Horizons declineddramatically. Our distributor agreements with Future and Nu Horizons do not contain minimum purchase commitments. As a result, Futureand Nu Horizons could cease purchasing our products with short notice or cease distributing these products. In addition, they may defer orcancel orders without penalty, which would likely cause our revenues to decline and materially and adversely impact our business, financialcondition and results of operations.
In January 2011 Arrow Electronics, Inc. acquired Nu Horizons. It is uncertain at this point what effect, if any, the acquisition may haveon our relationship with the combined company going forward. As Nu Horizons is currently one of our two primary distributors, if therelationship were to be terminated or altered in an unfavorable fashion, it could result in a material and adverse effect on our business, financialcondition and/or results of operations.
If we are unable to accurately forecast demand for our products, we may be unable to efficiently manage our inventory.
Due to the absence of substantial non-cancelable backlog, we typically plan our production and inventory levels based on customerforecasts, internal evaluation of customer demand and current backlog, which can fluctuate substantially. As a consequence of inaccuraciesinherent in forecasting, inventory imbalances periodically occur that result in surplus amounts of some of our products and shortages ofothers. Such shortages can adversely impact customer relations and surpluses can result in larger-than-desired inventory levels, either of whichcan materially and adversely impact our business, financial condition and results of operations. Due to the unpredictability of global economicconditions and increased difficulty in forecasting demand for our products, we could experience an increase in inventory levels.
In instances where we have hub agreements with certain vendors, the inability of our partners to provide accurate and timely informationregarding inventory and related shipments of the inventory may impact our ability to maintain the proper amount of inventory at the hubs,forecast usage of the inventory and record accurate revenue recognition which could materially and adversely impact our business, financialconditions and the results of operations.
If our distributors or sales representatives stop selling or fail to successfully promote our products, our business, financial conditionand results of operations could be materially and adversely impacted.
We sell many of our products through sales representatives and distributors, many of which sell directly to OEMs, contractmanufacturers and end customers. Our non-exclusive distributors and sales representatives may carry our competitors’ products, which couldadversely impact or limit sales of our products. Additionally, they could reduce or discontinue sales of our products or may not devote theresources necessary to sell our products in the volumes and within the time frames that we expect. Our agreements with distributors containlimited provisions for return of our products, including stock rotations whereby distributors may return a percentage of
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their purchases from us based upon a percentage of their most recent three or six months of shipments. In addition, in certain circumstancesupon termination of the distributor relationship, distributors may return some portion of their prior purchases. The loss of business from anyof our significant distributors or the delay of significant orders from any of them, even if only temporary, could materially and adverselyimpact our business, financial conditions and results of operations.
Moreover, we depend on the continued viability and financial resources of these distributors and sales representatives, some of whichare small organizations with limited working capital. In turn, these distributors and sales representatives are subject to general economic andsemiconductor industry conditions. We believe that our success will continue to depend on these distributors and sales representatives. If someor all of our distributors and sales representatives experience financial difficulties, or otherwise become unable or unwilling to promote andsell our products, our business, financial condition and results of operations could be materially and adversely impacted.
Our distributors rely heavily on the availability of short-term capital at reasonable rates to fund their ongoing operations. If this capital isnot available, or is only available on onerous terms, certain distributors may not be able to pay for inventory received or we may experience areduction in orders from these distributors, which would likely cause our revenue to decline and materially and adversely impact our business,financial condition and results of operations.
We depend in part on the continued service of our key engineering and management personnel and our ability to identify, hire,incentivize and retain qualified personnel. If we lose key employees or fail to identify, hire, incentivize and retain these individuals, ourbusiness, financial condition and results of operations could be materially and adversely impacted.
Our future success depends, in part, on the continued service of our key design engineering, technical, sales, marketing and executivepersonnel and our ability to identify, hire, motivate and retain other qualified personnel.
Under certain circumstances, including a company acquisition or business downturn, current and prospective employees may experienceuncertainty about their future roles with us. Volatility or lack of positive performance in our stock price and the ability to offer equitycompensation to as many key employees or in amounts consistent with market practices, as a result of regulations regarding the expensing ofequity awards, may also adversely affect our ability to retain key employees, all of whom have been granted equity awards. In addition,competitors may recruit our employees, as is common in the high tech sector. If we are unable to retain personnel that are critical to our futureoperations, we could face disruptions in operations, loss of existing customers, loss of key information, expertise or know-how, andunanticipated additional recruiting and training costs.
Competition for skilled employees having specialized technical capabilities and industry-specific expertise is intense and continues to bea considerable risk inherent in the markets in which we compete. At times, competition for such employees has been particularly notable inCalifornia, Canada and the People’s Republic of China (“PRC”). Further, the PRC historically has different managing principles from Westernstyle management and financial reporting concepts and practices, as well as different banking, computer and other control systems, making thesuccessful identification and employment of qualified personnel particularly important, and hiring and retaining a sufficient number of suchqualified employees may be difficult. As a result of these factors, we may experience difficulty in establishing management, legal and financialcontrols, collecting financial data, books of account and records and instituting business practices that meet Western standards, which couldmaterially and adversely impact our business, financial condition and results of operations.
Our employees are employed at-will, which means that they can terminate their employment at any time. Our international locations aresubject to local labor laws, which are often significantly different from U.S. labor laws and which may under certain conditions result in largeseparation costs upon termination. The failure to
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recruit and retain, as necessary, key design engineers and technical, sales, marketing and executive personnel could materially and adverselyimpact our business, financial condition and results of operations.
Stock-based awards are critical to our ability to recruit, retain and motivate highly skilled talent. In making employment decisions,particularly in the semiconductor industry and the geographies where our employees are located, a key consideration of current and potentialemployees is the value of the equity awards they receive in connection with their employment. If we are unable to offer employment packageswith a competitive equity award component, our ability to attract highly skilled employees would be harmed. In addition, volatility in our stockprice could result in a stock option’s exercise price exceeding the market value of our common stock or a deterioration in the value of restrictedstock units granted, thus lessening the effectiveness of stock-based awards for retaining and motivating employees. Similarly, decreases in thenumber of unvested in-the-money stock options held by existing employees, whether because our stock price has declined, options havevested, or because the size of follow-on option grants has declined, may make it more difficult to retain and motivate employees.Consequently, we may not continue to successfully attract and retain key employees, which could have an adverse effect on our business,financial condition and results of operations.
Occasionally, we enter into agreements that expose us to potential damages that exceed the value of the agreement.
We have given certain customers increased indemnification for product deficiencies or intellectual property infringement that is in excessof our standard limited warranty and indemnification provision and could possibly result in greater costs, in excess of the original contractvalue. In an attempt to limit this liability, we have purchased an errors and omissions insurance policy to partially offset these potentialadditional costs; however, our insurance coverage could be insufficient in terms of amount and/or coverage to prevent us from sufferingmaterial losses if the indemnification amounts are large enough or if there are coverage issues.
We may be exposed to additional credit risk as a result of the addition of significant direct customers through recent acquisitions.
From time to time one of our customers has contributed more than 10% of our quarterly net sales. A number of our customers areOEMs, or the manufacturing subcontractors of OEMs, which might result in an increase in concentrated credit risk with respect to our tradereceivables and therefore, if a large customer were to be unable to pay, it could materially and adversely impact our business, financialcondition and results of operations.
Any error in our sell-through revenue recognition judgment or estimates could lead to inaccurate reporting of our net sales, gross profit,deferred income and allowances on sales to distributors and net income.
Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion.Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as thequantities of our products they still have in stock. We must use estimates and apply judgment to reconcile distributors’ reported inventories totheir activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferred income and allowances onsales to distributors and net income, which could have an adverse effect on our business, financial condition and results of operations.
Because a significant portion of our total assets were, and may again be with future potential acquisitions, represented by goodwill andother intangible assets, which are subject to mandatory annual impairment evaluations, we could be required to write-off some or all ofour goodwill and other intangible assets, which may materially and adversely impact our business, financial condition and results ofoperations.
A significant portion of the purchase price for any business combination may be allocated to identifiable tangible and intangible assetsand assumed liabilities based on estimated fair values at the date of consummation. As required by U.S Generally Accepted AccountingPrinciples (“GAAP”), the excess purchase price, if any, over
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the fair value of these assets less liabilities typically would be allocated to goodwill. We evaluate goodwill for impairment on an annual basisor whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. We typically conduct our annualanalysis of our goodwill in the fourth quarter of our fiscal year. An in-process research and development (“IPR&D”) asset is considered anindefinite-lived intangible asset and is not subject to amortization until the conclusion of development. IPR&D assets must be tested forimpairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment testconsists of a comparison of the fair value of the IPR&D asset with its carrying amount. If the carrying amount of the IPR&D asset exceeds itsfair value, an impairment loss must be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjustedcarrying amount of the IPR&D asset will be its new accounting basis. If the fair value of the IPR&D asset exceeds the carrying amount, noadjustment is recorded. Subsequent reversal of a previously recognized impairment loss is prohibited. Once the IPR&D projects have beencompleted, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D project is abandoned, the carryingamount of the IPR&D project is written off. Intangible assets that are subject to amortization are reviewed for impairment on an annual basisor whenever events and changes in circumstances suggest that the carrying amount may not be recoverable.
The assessment of goodwill and other intangible assets impairment is a subjective process. Estimations and assumptions regarding futureperformance, results of our operations and comparability of our market capitalization and its net book value will be used. Changes in estimatesand assumptions could impact fair value resulting in an impairment, which could materially and adversely impact our business, financialcondition and results of operations.
Our business may be materially and adversely impacted if we fail to effectively utilize and incorporate acquired technology.
We have acquired and may in the future acquire intellectual property in order to accelerate our time to market for new products.Acquisitions of intellectual property may involve risks relating to, among other things, successful technical integration into new products,market acceptance of new products and achievement of planned return on investment. Successful technical integration in particular requires avariety of resources which we may not currently have, such as available technical staff with sufficient time to devote to integration, therequisite skill sets to understand the acquired technology and the necessary support tools to effectively utilize the technology. The timely andefficient integration of acquired technology may be adversely impacted by inherent design deficiencies or application requirements. Thepotential failure of or delay in product introduction utilizing acquired intellectual property could lead to an impairment of capitalized intellectualproperty acquisition costs, which could materially and adversely impact our business, financial condition and results of operations.
If we are unable to compete effectively with existing or new competitors, we will experience fewer customer orders, reduced revenues,reduced gross margins and lost market share.
We compete in markets that are intensely competitive, and which are subject to both rapid technological change, continued price erosionand changing business terms with regard to risk allocation. Our competitors include many large domestic and foreign companies that havesubstantially greater financial, technical and management resources, name recognition and leverage than we have. As a result, they may be ableto adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to promote thesale of their products.
We have experienced increased competition at the design stage, where customers evaluate alternative solutions based on a number offactors, including price, performance, product features, technologies, and availability of long-term product supply and/or roadmap guarantee.Additionally, we experience, in some cases, severe pressure on pricing from some of our competitors or on-going cost reduction expectationsfrom customers. Such circumstances may make some of our products unattractive due to price or performance measures and result in losingour design opportunities or causing a decrease in our revenue and margins. Also, competition from new companies in emerging economycountries with significantly lower costs could affect our selling price and gross
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margins. In addition, if competitors in Asia reduce prices on commodity products, it would adversely affect our ability to compete effectivelyin that region. Specifically, we have licensed rights to Hangzhou Silan Microelectronics Co. Ltd. and Hangzhou Silan Integrated Circuit Co.Ltd. (collectively “Silan”) in China to market our commodity interface products that could reduce our sales in the future should they become ameaningful competitor. Loss of competitive position could result in price reductions, fewer customer orders, reduced revenues, reduced grossmargins and loss of market share, any of which would adversely affect our operating results and financial condition. To the extent that ourcompetitors offer distributors or sales representatives more favorable terms, these distributors and sales representatives may decline to carry,or discontinue carrying, our products. Our business, financial condition and results of operations could be harmed by any failure to maintainand expand our distribution network. Furthermore, many of our existing and potential customers internally develop solutions which attempt toperform all or a portion of the functions performed by our products. To remain competitive, we continue to evaluate our manufacturingoperations for opportunities for additional cost savings and technological improvements. If we or our contract partners are unable tosuccessfully implement new process technologies and to achieve volume production of new products at acceptable yields, our business,financial condition and results of operations may be materially and adversely affected. Our future competitive performance depends on anumber of factors, including our ability to:
• increase device performance and improve manufacturing yields;
• accurately identify emerging technological trends and demand for product features and performance characteristics;
• develop and maintain competitive and reliable products;
• enhance our products by adding innovative features that differentiate our products from those of our competitors;
• bring products to market on a timely basis at competitive prices;
• respond effectively to new technological changes or new product announcements by others;
• adapt products and processes to technological changes;
• adopt or set emerging industry standards;
• meet changing customer requirements; and
• provide adequate technical service and support.
Our design, development and introduction schedules for new products or enhancements to our existing and future products may not bemet. In addition, these products or enhancements may not achieve market acceptance, or we may not be able to sell these products at prices thatare favorable, which could materially and adversely affect on our business, financial condition and results of operations.
We depend on third-party subcontractors to manufacture our products. We utilize wafer foundries for processing our wafers andassembly and test subcontractors for manufacturing and testing our packaged products. Any disruption in or loss of foundries orsubcontractors’ capacity to manufacture and test our products subjects us to a number of risks, including the potential for aninadequate supply of products and higher materials costs. These risks may lead to delayed product delivery or increased costs, whichcould materially and adversely impact our business, financial condition and results of operations.
We do not own or operate a semiconductor fabrication facility or a foundry. We utilize various foundries for different processes. Ourproducts are based on Complementary Metal Oxide Semiconductor (“CMOS”) processes, bipolar processes and bipolar-CMOS (“BiCMOS”)processes. Globalfoundries Singapore Pte. Ltd. (f.k.a. Chartered Semiconductor Manufacturing Ltd.) (“Globalfoundries”) manufactures themajority of the CMOS wafers from which the majority of our communications and UART products are produced. Episil Technologies, Inc.(“Episil”), located in Taiwan, and Silan, located in China, manufacture the majority of the CMOS and bipolar wafers from which our powerand serial products are produced. High Voltage BiCMOS
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power products are supplied by Jazz Semiconductor (CA, USA). All of these foundries produce semiconductors for many other companies(many of which have greater requirements than us), and therefore, we may not have access on a timely basis to sufficient capacity or certainprocess technologies and we do, from time to time, experience extended lead times on some products. In addition, we rely on our foundries’continued financial health and ability to continue to invest in smaller geometry manufacturing processes and additional wafer processingcapacity.
Many of our new products are designed to take advantage of smaller geometry manufacturing processes. Due to the complexity andincreased cost of migrating to smaller geometries as well as process changes, we could experience interruptions in production or significantlyreduced yields causing product introduction or delivery delays. If such delays occur, our products may have delayed market acceptance orcustomers may select our competitors’ products during the design process.
New process technologies or new products can be subject to especially wide variations in manufacturing yields and efficiency. There canbe no assurance that our foundries or the foundries of our suppliers will not experience unfavorable yield variances or other manufacturingproblems that result in delayed product introduction or delivery delays.
Our foundries manufacture our products on a purchase order basis. We provide our foundries with rolling forecasts of our productionrequirements; however, the ability of our foundries to provide wafers is limited by the foundries’ available capacity. There can be no assurancethat our third-party foundries will allocate sufficient capacity to satisfy our requirements. In addition, we may not continue to do business withour foundries on terms as favorable as our current terms.
Furthermore, any sudden reduction or elimination of any primary source or sources of fully processed wafers could result in a materialdelay in the shipment of our products. Any delays or shortages will materially and adversely impact our business, financial condition andresults of operations. In particular, the products produced from the wafers manufactured by Episil and Silan currently constitute a significantpart of our total revenue, and so any delay, reduction or elimination of our ability to obtain wafers from either foundry could materially andadversely impact our business, financial condition and results of operations.
Our reliance on our wafer foundries and assembly and test subcontractors involves the following risks:
• a manufacturing disruption or sudden reduction or elimination of any existing source or sources of semiconductor manufacturing
materials or processes, which might include the potential closure, change of ownership, change in business conditions orrelationships, change of management or consolidation by one of our foundries;
• disruption of manufacturing or assembly or test services due to relocation or limited capacity of the foundries or subcontractors;
• inability to obtain or develop technologies needed to manufacture our products;
• extended time required to identify, qualify and transfer to alternative manufacturing sources for existing or new products or thepossible inability to obtain an adequate alternative;
• failure of our foundries or subcontractors to obtain raw materials and equipment;
• increasing cost of commodities, such as gold, raw materials and energy resulting in higher wafer or package costs;
• long-term financial and operating stability of the foundries, or their suppliers or subcontractors, and their ability to invest in newcapabilities and expand capacity to meet increasing demand, to remain solvent, or to obtain financing in tight credit markets;
• continuing measures taken by our suppliers such as reductions in force, pay reductions, forced time off or shut down of productionfor extended periods of time to reduce and/or control operating expenses in response to weakened customer demand;
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• subcontractors’ inability to transition to smaller package types or new package compositions;
• a sudden, sharp increase in demand for semiconductor devices, which could strain the foundries’ or subcontractors’ manufacturingresources and cause delays in manufacturing and shipment of our products;
• manufacturing quality control or process control issues, including reduced control over manufacturing yields, production schedulesand costs and product quality;
• potential misappropriation of our intellectual property;
• disruption of transportation to and from Asia where most of our foundries and subcontractors are located;
• political, civil, labor and economic instability;
• embargoes or other regulatory limitations affecting the availability of raw materials, equipment or changes in tax laws, tariffs, servicesand freight rates; and
• compliance with local or international regulatory requirements.
Additional risks associated with subcontractors include:
• subcontractors imposing higher minimum order quantities for substrates;
• potential increase in assembly and test costs;
• our board level product volume may not be attractive to preferred manufacturing partners, which could result in higher pricing orhaving to qualify an alternative vendor;
• difficulties in selecting, qualifying and integrating new subcontractors;
• entry into “take-or-pay” agreements; and
• limited warranties from our subcontractors for products assembled and tested for us.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could besubject to significant fluctuations due to, among other reasons:
• our anticipated or actual operating results;
• announcements or introductions of new products by us or our competitors;
• technological innovations by us or our competitors;
• investor’s perception of the semiconductor sector;
• loss of or changes to key executives;
• product delays or setbacks by us, our customers or our competitors;
• potential supply disruptions;
• sales channel interruptions;
• concentration of sales among a small number of customers;
• conditions in our customers’ markets and the semiconductor markets;
• the commencement and/or results of litigation;
• changes in estimates of our performance by securities analysts;
• decreases in the value of our investments or long-lived assets, thereby requiring an asset impairment charge against earnings;
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• repurchasing shares of our common stock;
• announcements of merger or acquisition transactions; and/or
• general global economic and capital market conditions.
In the past, securities and class action litigation has been brought against companies following periods of volatility in the market prices oftheir securities. We may be the target of one or more of these class action suits, which could result in significant costs and divertmanagement’s attention, thereby materially and adversely impact our business, financial condition and results of operations.
In addition, at times the stock market has experienced and is currently experiencing extreme price, volume and value fluctuations thataffect the market prices of the stock of many high technology companies, including semiconductor companies, and that are unrelated ordisproportionate to the operating performance of those companies. Any such fluctuations may harm the market price of our common stock.
Our results of operations could vary as a result of the methods, estimations and judgments we use in applying our accounting policies.
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations.Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties, assumptions and changes in rulemakingby the regulatory bodies; and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in thosemethods, estimates and judgments could materially and adversely impact our business, financial condition and results of operations. Ourrevenue reporting is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion. Distributors provideus periodic data regarding the product, price, quantity and end customer when products are resold as well as the quantities of our products theystill have in stock. We must use estimates and apply judgment to reconcile distributors’ reported inventories to their activities. Any error in ourjudgment could lead to inaccurate reporting of our revenues, deferred income and allowances on sales to distributors and net income.
The final determination of our income tax liability may be materially different from our income tax provision, which could have anadverse effect on our business, financial condition and results of operations.
Our future effective tax rates may be adversely affected by a number of factors including:
• the jurisdictions in which profits are determined to be earned and taxed;
• the resolution of issues arising from tax audits with various tax authorities;
• changes in the valuation of our deferred tax assets and liabilities;
• adjustments to estimated taxes upon finalization of various tax returns;
• increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development andimpairment of goodwill in connection with acquisitions;
• changes in available tax credits;
• changes in stock-based compensation expense;
• changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles; and/or
• the repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
Any significant increase in our future effective tax rates could adversely impact net income for future periods. In addition, the U.S.Internal Revenue Service (“IRS”) and other tax authorities regularly examine our
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income tax returns. Our business, financial condition and results of operations could be materially and adversely impacted if these assessmentsor any other assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved inour favor.
We have acquired significant Net Operating Loss (“NOL”) carryforwards as a result of our acquisitions. The utilization of acquiredNOL carryforwards is subject to the IRS’s complex limitation rules that carry significant burdens of proof. Limitations include certain levelsof a change in ownership. As a publicly traded company, such change in ownership by shareholders, such as Future and Soros, may be out ofour control. Our eventual ability to utilize our estimated NOL carryforwards is subject to IRS scrutiny and our future results may not benefitas a result of potential unfavorable IRS rulings.
Our engagement with foreign customers could cause fluctuations in our operating results, which could materially and adversely impactour business, financial condition and results of operations.
International sales have accounted for, and will likely continue to account for a significant portion of our revenues, which subjects us tothe following risks, among others:
• changes in regulatory requirements;
• tariffs and other barriers;
• timing and availability of export or import licenses;
• disruption of services due to political, civil, labor, and economic instability;
• disruption of services due to natural disasters outside the United States;
• disruptions to customer operations outside the United States due to the outbreak of communicable diseases;
• difficulties in accounts receivable collections;
• difficulties in staffing and managing foreign subsidiary and branch operations;
• difficulties in managing sales channel partners;
• difficulties in obtaining governmental approvals for communications and other products;
• limited intellectual property protection;
• foreign currency exchange fluctuations;
• the burden of complying with foreign laws and treaties;
• contractual or indemnity issues that are materially different from our standard sales terms; and
• potentially adverse tax consequences.
In addition, because sales of our products have been denominated primarily in U.S. dollars, increases in the value of the U.S. dollar ascompared with local currencies could make our products more expensive to customers in the local currency of a particular country resulting inpricing pressures on our products. Increased international activity in the future may result in foreign currency denominated sales. Furthermore,because some of our customers’ purchase orders and agreements are governed by foreign laws, we may be limited in our ability, or it may betoo costly for us, to enforce our rights under these agreements and to collect damages, if awarded.
Because some of our IC products have lengthy sales cycles, we may experience substantial delays between incurring expenses related toproduct development and the revenue derived from these products.
A portion of our revenue is derived from selling ICs to communications equipment vendors. Due to their product development cycle, wehave typically experienced at least an eighteen-month time lapse between our initial contact with a customer and realizing volume shipments.We first work with customers to achieve a design
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win, which may take nine months or longer. Our customers then complete their design, test and evaluation process and begin to ramp-upproduction, a period which typically lasts an additional nine months. The customers of communications equipment manufacturers may alsorequire a period of time for testing and evaluation, which may cause further delays. As a result, a significant period of time may elapsebetween our research and development efforts and our realization of revenue, if any, from volume purchasing of our communications productsby our customers. Due to the length of the communications equipment vendors’ product development cycle, the risks of project cancellation byour customers, price erosion or volume reduction are common aspects of such engagements.
Our backlog may not result in revenue.
Due to the possibility of customer changes in delivery schedules and quantities actually purchased, cancellation of orders, distributorreturns or price reductions, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. The stillunsettled and weakened economy increases the risk of purchase order cancellations or delays, product returns and price reductions. We maynot be able to meet our expected revenue levels or results of operations if there is a reduction in our order backlog for any particular period andwe are unable to replace those sales during the same period.
Earthquakes and other natural disasters, such as the recent earthquake and tsunami in Japan, may damage our facilities or those ofour suppliers and customers.
The occurrence of natural disasters in certain regions, such as the recent earthquake and tsunami in Japan, could adversely impact ourmanufacturing and supply chain, our ability to deliver products on a timely basis (or at all) to our customers and the cost of or demand for ourproducts. Our corporate headquarters in Fremont, California is located near major earthquake faults that have experienced seismic activity. Inaddition, some of our other offices, customers and suppliers are in locations which may be subject to similar natural disasters. In the event of amajor earthquake or other natural disaster near our offices, our operations could be disrupted. Similarly, a major earthquake or other naturaldisaster affecting one or more of our major customers or suppliers could adversely impact the operations of those affected, which coulddisrupt the supply or sales of our products and harm our business, financial condition and results of operations.
We may be unable to protect our intellectual property rights, which could harm our competitive position.
Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents,trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements toprotect our intellectual property rights. Despite these efforts, we may be unable to protect our proprietary information. Such intellectualproperty rights may not be recognized or if recognized, may not be commercially feasible to enforce. Moreover, our competitors mayindependently develop technology that is substantially similar or superior to our technology.
More specifically, our pending patent applications or any future applications may not be approved, and any issued patents may notprovide us with competitive advantages or may be challenged by third parties. If challenged, our patents may be found to be invalid orunenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others may independentlydevelop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us.
We could be required to pay substantial damages or could be subject to various equitable remedies if it were proven that we infringed theintellectual property rights of others.
As a general matter, the semiconductor industry is characterized by ongoing litigation regarding patents and other intellectual propertyrights. If a third party were to prove that our technology infringed its intellectual property rights, we could be required to pay substantialdamages for past infringement and could be required to
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pay license fees or royalties on future sales of our products. If we were required to pay such license fees whenever we sold our products, suchfees could exceed our revenue. In addition, if it was proven that we willfully infringed a third party’s proprietary rights, we could be heldliable for three times the amount of the damages that we would otherwise have to pay. Such intellectual property litigation could also require usto:
• stop selling, incorporating or using our products that use the infringed intellectual property;
• obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license maynot be available on commercially reasonable terms, if at all; and/or
• redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible.
The defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive and could require a significantportion of management’s time. In addition, rather than litigating an infringement matter, we may determine that it is in our best interests tosettle the matter. Terms of a settlement may include the payment of damages and our agreement to license technology in exchange for a licensefee and ongoing royalties. These fees could be substantial. If we were required to pay damages or otherwise became subject to such equitableremedies, our business, financial condition and results of operations would suffer. Similarly, if we were required to pay license fees to thirdparties based on a successful infringement claim brought against us, such fees could exceed our revenue. ITEM 1B. UNRESOLVED STAFF COMMENTS
None. ITEM 2. PROPERTIES
Our executive offices and our marketing and sales, research and development, manufacturing, test and engineering operations are locatedin Fremont, California in two adjacent buildings that we own, which consist of approximately 151,000 square feet. Additionally, we ownapproximately 4.5 acres of partially developed property adjacent to our headquarters, which is presently being held for future office expansion.
We also lease smaller facilities in Belgium, Canada, China, Japan, Korea, Malaysia, Taiwan and the United States, which are occupiedby administrative offices, sales offices, design centers and field application engineers.
Based upon our estimates of future hiring, we believe that our current facilities will be adequate to meet our requirements at least throughthe next fiscal year.
During fiscal years 2011, 2010 and 2009, we also leased one additional building in California, totaling approximately 95,700 square feet,which was subleased to a tenant. The sublease began on April 15, 2008 and expired March 31, 2011. In accordance with the lease agreement,the leased building was returned to the lessor on March 31, 2011. For further discussion of this facility and its effect on our financial conditionand results of operations, see Part II, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations”and in Part II, Item 8 —“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 15—LeaseFinancing Obligation.” ITEM 3. LEGAL PROCEEDINGS
Information required by this item is set forth in Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes toConsolidated Financial Statements, Note 17—Legal Proceedings” of this Annual Report and is incorporated by reference herein. ITEM 4. (REMOVED AND RESERVED)
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PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on The NASDAQ Global Market under the symbol “EXAR.” The following table set forth the range ofhigh and low sales prices of our common stock for the periods indicated, as reported by The NASDAQ Global Market.
Common StockPrice
High Low
Fiscal year 2011
Fourth quarter ended March 27, 2011 $7.25 $5.72 Third quarter ended December 26, 2010 7.19 5.73 Second quarter ended September 26, 2010 7.23 5.40 First quarter ended June 27, 2010 7.74 6.69
Fiscal year 2010
Fourth quarter ended March 28, 2010 $7.78 $6.66 Third quarter ended December 27, 2009 7.95 6.30 Second quarter ended September 27, 2009 7.98 6.77 First quarter ended June 28, 2009 7.43 5.70
The closing sales price for our common stock on May 27, 2011, was $6.34 per share. As of May 27, 2011, the approximate number ofrecord holders of our common stock was 269 (not including beneficial owners of stock held in street name).
Dividend Policy
We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on ourcommon stock. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination topay dividends on our common stock will be, subject to applicable law, at the discretion of our board of directors and will depend upon, amongother factors, our results of operations, financial condition, capital requirements and contractual restrictions.
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Stock Price Performance
The following table and graph shows a five-year comparison of cumulative total stockholder returns for Exar, The NASDAQComposite Index, and The NASDAQ Electronic Components Index (SIC code 3670-3679). The table and graph assumed the investment of$100 in stock or index on March 31, 2006 and that all dividends, if any, were reinvested. We have never paid cash dividends on our commonstock. The performance shown is not necessarily indicative of future performance.
On March 16, 2010, June 17, 2009, April 3, 2009 and August 25, 2007, we acquired Neterion, Galazar, Hifn and Sipex, respectively.Accordingly, the results of operations of Neterion, Galazar, Hifn and Sipex have been included in our consolidated financial statements sinceMarch 17, 2010, June 18, 2009, April 4, 2009 and August 26, 2007, respectively. See Part II, Item 8—“Financial Statements andSupplementary Data” and “Notes to Consolidated Financial Statements, Note 3—Business Combinations.”
The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto and“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this AnnualReport. As of and For the Years Ended
March 27,2011(5)
March 28,2010(4)
March 29,2009(3)
March 30,2008(2)
March 31,2007(1)
Consolidated statements of operations data:
Net sales $ 146,005 $ 134,878 $ 115,118 $ 89,743 $ 68,502 Gross profit 63,997 63,382 50,245 40,112 46,534 Loss from operations (40,018) (33,990) (80,222) (202,438) (4,229) Net income (loss) (35,668) (28,110) (73,036) (195,879) 8,024
(1) Fiscal year 2007 includes an impairment charge of $1.0 million related to our non-marketable securities; and separation costs of $1.6
million related to the resignations of two former executives.(2) Fiscal year 2008 includes $5.4 million of amortization of intangible assets acquired in connection with the Sipex acquisition; $8.8 million
of IPR&D written off in connection with the Sipex acquisition; $165.2 million impairment charge on goodwill and other intangible assets;separation expenses of $0.5 million related to our former chief executive officer; and $0.6 million impairment loss related to our non-marketable securities.
(3) Fiscal year 2009 includes $59.7 million impairment charge on goodwill and other intangible assets; $2.7 million of amortization ofintangible assets acquired in connection with the Sipex acquisition; $1.2 million charge for accelerated depreciation on abandonedequipment; and $1.8 million impairment loss related to our investment in marketable and non-marketable securities.
(4) Fiscal year 2010 includes $7.4 million amortization of intangible assets acquired in connection with the Hifn, Sipex, Galazar and Neterionacquisitions; $2.3 million fair value adjustments of inventories in connection with Hifn and Galazar acquisitions; $6.2 million acquisitionrelated expenses; $0.1 million separation expense related to an executive officer; and $0.3 million impairment loss related to the investmentin marketable and non-marketable securities.
(5) Fiscal year 2011 includes $9.5 million amortization of intangible assets acquired in connection with the Hifn, Sipex, Galazar and Neterionacquisitions; $7.5 million impairment of intangible assets; $3.6 million exit costs related to the decision to exit the 10 Gigabit Ethernetmarket; and $0.3 million acquisition related costs.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as informationcontained in “Risk Factors” above and elsewhere in this Annual Report on Form 10-K contains “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, thatinvolve risks and uncertainties. Please see “Forward Looking Statements” in Part I above. Actual results may differ materially from thoseprojected in the forward-looking statements as a result of various factors, including, among others, those identified above under Part I,Item 1A—“Risk Factors.”
COMPANY OVERVIEW
Exar Corporation and its subsidiaries (“Exar” or “we”) is a fabless semiconductor company that designs, sub-contracts manufacturingand sells highly differentiated silicon, software and subsystem solutions for industrial, telecom, networking and storage applications. Our coreexpertise in silicon integration, system architecture and software has enabled the development of innovative solutions designed to meet theneeds of the evolving connected world. Our product portfolio includes power management and interface components, communicationsproducts, storage optimization solutions, network security and applied service processors. Applying both analog and digital technologies, ourproducts are deployed in a wide array of applications such as portable electronic devices, set top boxes, digital video recorders,telecommunication systems, servers, enterprise storage systems and industrial automation equipment. We provide customers with a breadth ofcomponent products and subsystem solutions based on advanced silicon integration.
We market our products worldwide with sales offices and personnel located throughout the Americas, Europe, and Asia. Our productsare sold in the United States through a number of manufacturers’ representatives and distributors. Internationally, our products are soldthrough various regional and country specific distributors with locations around the globe. In addition to our sales offices, we also employ aworldwide team of field application engineers to work directly with our customers.
Our international sales consist of sales that are denominated in U.S. dollars. Our international related operations expenses expose us tofluctuations in currency exchange rates because our foreign operating expenses are denominated in foreign currency while our sales aredenominated in U.S. dollars. Our operating results are subject to quarterly and annual fluctuations as a result of a variety of factors that couldmaterially and adversely affect our future profitability as described in “Part I, Item 1A. Risk Factors—Our Financial Results May FluctuateSignificantly Because Of A Number Of Factors, Many Of Which Are Beyond Our Control.”
On March 16, 2010, we completed the acquisition of Neterion, Inc. (“Neterion”), a developer of 10 gigabit Ethernet (10GbE) controllersilicon and card solutions optimized for virtualized environments located in Sunnyvale, California. During the course of fiscal 2011, Exarparticipated in the 10GbE market and established a limited set of customers but fell short of customer expansion and revenue growth goals forthe product line. After assessing our market position, degree of target customer adoption and development roadmap, we announced onMarch 4, 2011 that we had decided to exit the data center virtualization market and, in connection therewith, had decided to discontinuedevelopment of these products. We immediately reduced our resources and began a process to sell assets devoted to the development of theseproducts.
On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (“Galazar”), a fabless semiconductor company focused oncarrier grade transport over telecom networks based in Ottawa, Ontario, Canada. Galazar’s product portfolio addressed transport of a widerange of datacom and telecom services including Ethernet, SAN, TDM and video over SONET/SDH, PDH and OTN networks.
On April 3, 2009, we completed the acquisition of hi/fn, inc. (“Hifn”), a provider of network- and storage-security and data reductionproducts located in Los Gatos, California.
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Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. The three fiscal years 2011,2010 and 2009 are each comprised of 52-week periods. Fiscal year 2012 will consist of 53 weeks. Fiscal years ended March 27,2011, March 28, 2010 and March 29, 2009 are also referred to as “2011,” “2010” and “2009” unless otherwise indicated.
EXECUTIVE SUMMARY
During fiscal year 2011 net sales increased eight percent as compared to fiscal 2010. The increase reflects significant growth of ourinterface and power product lines in the first half of the year followed by significant declines in all product lines in the second half of the yearas we, like the semiconductor industry at large, experienced an inventory correction by both distributors and end customers. We expanded oursales channel relationships in 2011 by adding key partners Arrow Electronics, who acquired our second largest distributor Nu Horizons, andDigi-Key Electronics. We introduced 19 new products to our target markets.
During fiscal year 2011 our business was affected by the industry’s inventory correction, and we had to make some difficult strategicdecisions. As announced in March 2011, we decided to exit the data center virtualization market and, in connection therewith, to discontinuedevelopment of our 10GbE network adapter cards. We entered this market in March 2010 with our acquisition of Neterion and experiencedslower market adoption and higher development costs than initially expected. We determined that the current economic and marketenvironment did not provide the potential to deliver acceptable returns on the required investments in these products.
With the start of fiscal year 2012, we are excited about the interest generated by Power , our programmable power management productfamily, and our new DX family of data security and compression products. We expect to provide samples of our dual channel 10 Gb OTNproduct, MXP2, this fiscal year. We believe there is significant interest from top tier optical telecom suppliers for MXP2 as it allows them toreplace solutions with multiple expensive and power hungry FPGAs. Although our industry can be cyclical and macroeconomics conditionscan be uncertain, we believe we are positioned to grow our revenue, gross margins and have significantly reduced operating expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements and accompanying disclosures in conformity with U.S. generally accepted accountingprinciples (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The U.S. Securitiesand Exchange Commission (“SEC”) has defined a company’s critical accounting policies as policies that are most important to the portrayal ofa company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments,often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our mostcritical accounting policies and estimates to be as follows: (1) revenue recognition; (2) valuation of inventories; (3) income taxes; (4) stock-based compensation; (5) goodwill; (6) long-lived assets; and (7) valuation of business combinations; each of which is addressed below. Wealso have other key accounting policies that involve the use of estimates, judgments and assumptions that are significant to understanding ourresults. For additional information, see Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to ConsolidatedFinancial Statements, Note 2—Accounting Policies.” Although we believe that our estimates, assumptions and judgments are reasonable, theyare based upon information presently available. Actual results may differ significantly from these estimates if the assumptions, judgments andconditions upon which they are based turn out to be inaccurate.
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Revenue Recognition
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) authoritative guidance for RevenueRecognition. Four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.
We derive revenue principally from the sale of our products to distributors and to OEMs or their contract manufacturers. Our deliveryterms are primarily FOB shipping point, at which time title and all risks of ownership are transferred to the customer.
Software became an element of our revenue upon the acquisition of Hifn in April 2009. To date, software revenue has been animmaterial portion of our net sales.
Non-distributors
For non-distributors, revenue is recognized when title to the product is transferred to the customer, which occurs upon shipment ordelivery, depending upon the terms of the customer order, provided that persuasive evidence of a sales arrangement exists, the price is fixed ordeterminable, collection of the resulting receivables is reasonably assured, there are no customer acceptance requirements and there are noremaining significant obligations. Provisions for returns and allowances for non-distributor customers are provided at the time product salesare recognized. Allowances for sales returns and other reserves are recorded based on historical experience or specific identification of anevent necessitating an allowance.
Our history of actual returns from our non-distributors has not been material and, therefore, the allowance for sales returns for non-distributor customers is not significant.
Distributors
Agreements with our two primary distributors permit the return of 3% to 5% of their purchases during the preceding quarter forpurposes of stock rotation. For one of these distributors, a scrap allowance of 2% of the preceding quarter’s purchases is permitted. We alsoprovide discounts to certain distributors based on volume of product they sell for a specific product with a specific volume range for a givencustomer over a period not to exceed one year.
We recognize revenue from each of our distributors using either the sell-in basis or sell-through basis, each as described below. Onceadopted, the basis for revenue recognition for a distributor is maintained unless there is a change in circumstances indicating the basis forrevenue recognition for that distributor is no longer appropriate.
• Sell-in Basis—Revenue is recognized upon shipment if we conclude we meet the same criteria as for non-distributors discussedabove and we can reasonably estimate the credits for returns, pricing allowances and/or other concessions. We record an estimatedallowance, at the time of shipment, based upon historical patterns of returns, pricing allowances and other concessions (i.e., “sell-in”basis).
• Sell-through Basis—Revenue and the related costs of sales are deferred until the resale to the end customer if we grant more thanlimited rights of return, pricing allowances and/or other concessions or if we cannot reasonably estimate the level of returns andcredits issuable (i.e., “sell-through” basis). Under the sell-through basis, accounts receivable are recognized and inventory is relievedupon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceableright to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred income andallowances on sales to distributors in the consolidated balance sheet. When the related product is sold by our distributors to their endcustomers, at which time the ultimate price we receive is known, we recognize previously deferred income as sales and cost of sales.
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Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion.Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as thequantities of our products they still have in stock. We must use estimates and apply judgments to reconcile distributors’ reportedinventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferredincome and allowances on sales to distributors and net income.
Valuation of Inventories
Our policy is to establish a provision for excess inventories, based on the nature of the specific product, that is greater than twelvemonths of forecasted demand unless there are other factors indicating that the inventories will be sold at a profit after such periods. Amongother factors, management considers known backlog of orders, projected sales and marketing forecasts, shipment activity, inventory-on-handat our primary distributors, past and current market conditions, anticipated demand for our products, changing lead times in the manufacturingprocess and other business conditions when determining if a provision for excess inventory is required. Should the assumptions used bymanagement in estimating the provision for excess inventory differ from actual future demand or should market conditions become lessfavorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on ourgross margins. See Part I, Item 1A. “Risk Factors—‘Our Financial Results May Fluctuate Significantly Because Of A Number Of Factors,Many Of Which Are Beyond Our Control’.”
Income Taxes
We determine our deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of our assetsand liabilities. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimatesand judgments occur in the calculation of certain deferred tax assets and liabilities, which arise from timing differences in the recognition ofrevenue and expense for tax and financial statement purposes. Such deferred income tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respectivetax base, operating losses and tax credit carryforwards. Changes in tax rates affect the deferred income tax assets and liabilities and arerecognized in the period in which the tax rates or benefits are enacted.
We must determine the probability that we will be able to utilize our deferred tax assets. A valuation allowance is provided when it ismore likely than not that some portion or all of a deferred tax asset will not be realized. We measure and recognize uncertain tax positions inaccordance with GAAP, whereby we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the taxposition will be sustained on examination by the taxing authorities, based on the merits of the position. See Part II, Item 8—“FinancialStatements and Supplementary Data” and “Notes to Consolidated Financial Statements, Note 18—Income Taxes” for more details about ourdeferred tax assets and liabilities
Stock-Based Compensation
We compute the fair value of stock options utilizing the Black-Scholes model. Calculating stock-based compensation expense requiresthe input of highly subjective assumptions. The assumptions used in calculating the fair value of stock-based compensation represent ourestimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use differentassumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate theexpected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different fromour estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. SeePart II, Item 8—“Financial Statements and Supplementary Data” and “Notes to the Consolidated Financial Statements, Note 13—Stock-Based Compensation” for more details about our assumptions used in calculating the stock-based compensation expenses and equity relatedtransactions during the fiscal year.
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Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in abusiness combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest thatthe carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairmentof goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of thereporting unit. The fair value of the reporting unit is estimated using a combination of the income approach that uses discounted cash flowsand the market approach that utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwillis considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one reporting unit, weutilize an entity-wide approach to assess goodwill for impairment.
Long-Lived Assets
We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets orthe asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment review include significantnegative industry or economic trends and significant changes or planned changes in our use of the assets. These factors can also be referred toas triggering events. We measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value ofthe asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carrying value is notrecoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is measured bycomparing the difference between the asset grouping’s carrying value and its fair value. Long-lived assets such as goodwill; intangible assets;and property, plant and equipment are considered non-financial assets, and are recorded at fair value only if an impairment charge isrecognized.
Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows.We operate with one asset group on an enterprise basis. As a result, we believe the lowest identifiable cash flows reside at the enterprise level.
When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciationand/or amortization over the assets’ new, shorter useful lives. See “Goodwill and Other Intangible Asset Impairment” in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations below for more details regarding charges associated with theshortening of useful lives of certain intangible assets.
Valuation of Business Combinations
We periodically evaluate potential strategic acquisitions to build upon our existing library of intellectual property, human capital andengineering talent, in order to expand our capabilities in the areas in which we operate or to acquire complementary businesses.
We account for each business combination by applying the acquisition method, which requires (i) identifying the acquiree;(ii) determining the acquisition date; (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest of Exar in the acquiree at their acquisition date fair value; and (iv) recognizing and measuring goodwill or a gain from abargain purchase.
Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value on theacquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, we typically account for theacquired contingencies using existing guidance for a reasonable estimate.
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To establish fair value, we measure the price that would be received to sell an asset or paid to transfer a liability in an ordinary transactionbetween market participants. The measurement assumes the highest and best use of the asset by the market participants that would maximizethe value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the assetis different.
Goodwill is measured and recorded as the amount, by which the consideration transferred, generally at the acquisition date fair value,exceeds the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controlling interest of Exar in theacquiree. To the contrary, if the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controllinginterest of Exar in the acquiree exceeds the consideration transferred, it is considered a bargain purchase and we would recognize the resultinggain in earnings on the acquisition date.
In-process research and development (“IPR&D”) assets are considered an indefinite-lived intangible asset and are not subject toamortization until its useful life is determined to be no longer indefinite. IPR&D assets must be tested for impairment annually or morefrequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of thefair value of the IPR&D asset with its carrying amount. If the carrying amount of the IPR&D asset exceeds its fair value, an impairment lossmust be recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the IPR&Dasset will be its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited. The initial determinationand subsequent evaluation for impairment of the IPR&D asset requires management to make significant judgments and estimates. Once theIPR&D projects have been completed, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset isabandoned, the remaining carrying value is written off.
Acquisition-related costs, including finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees areaccounted for as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issuedebt or equity securities are recognized in accordance with other applicable GAAP.
RESULTS OF OPERATIONS
On April 3, 2009, June 17, 2009 and March 16, 2010, we acquired Hifn, Galazar and Neterion, respectively. Accordingly, the results ofoperations of Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18, 2009 andMarch 17, 2010, respectively.
Net Sales by Product Line
The following table shows net sales by product line in dollars and as a percentage of net sales for the periods indicated (in thousandsexcept percentages):
Net sales from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18,2009 and March 17, 2010, respectively. Software revenues have been an immaterial portion of our net sales.
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Fiscal Year 2011 versus Fiscal Year 2010
Communication
Net sales of communication products, including network access, transmission and network transport products, for fiscal year 2011decreased $0.9 million as compared to fiscal year 2010 primarily due to lower shipments of our network transport products.
Datacom and Storage
Net sales of datacom and storage products include network access and storage products, encryption, data reduction, packet processingproducts as well as 10GbE controller silicon and card solutions from the Neterion acquisition. The $16.9 million in net sales in fiscal year2011 includes $2.7 million in sales of 10GbE controller products. Excluding the sales of 10GbE products, net sales of datacom and storageproducts for fiscal year 2011 decreased $10.8 million as compared to fiscal year 2010 primarily due to slower demand with an inventorycorrection at certain OEM customers and discontinued programs at a certain customer.
Interface
Net sales of interface products, including UARTs and serial transceiver products, for fiscal year 2011 increased $15.0 million ascompared to fiscal year 2010 primarily due to higher sales of serial transceivers through our Asian distributor channel partners.
Power Management
Net sales of power management products, including DC-DC regulators and LED drivers, for fiscal year 2011 increased $5.4 million ascompared to fiscal year 2010 primarily due to higher sales through our Asian distributor channel partners.
Fiscal Year 2010 versus Fiscal Year 2009
Communication
Net sales of communication products, including network access and transmission products and optical products as well as networktransport products from the Galazar acquisition, for fiscal year 2010 decreased $3.7 million as compared to fiscal year 2009 and included $2.4million of additional sales of Galazar products.
Excluding the additional Galazar sales, network access and transmission products for fiscal year 2010 decreased $6.2 million primarilydue to decreased customer demand for our SONET products, and a decrease in customer demand for our optical products related to end of lifepurchase in fiscal year 2009 with a resulting decrease in units sold.
Datacom and Storage
Net sales of datacom and storage products include network access and storage products, encryption, data reduction and packetprocessing products from the Hifn acquisition as well as 10GbE controller silicon and card solutions from the Neterion acquisition. The $25.3million in net sales in fiscal year 2010 includes $25.1 million in sales of Hifn products and $0.2 million in sales of Neterion products.
Interface
Net sales of interface products, including UARTs, video, imaging, transceivers and other products for fiscal year 2010 decreased $1.1million as compared to fiscal year 2009 primarily due to price erosion on certain products.
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Power Management
Net sales of power management products, including DC-DC regulators and LED drivers, for fiscal year 2010 decreased $0.6 million ascompared to fiscal year 2009 primarily due to decreased customer demand with a resulting decrease in units sold in fiscal year 2010 and priceerosion on a limited number of products.
Net Sales by Channel
For fiscal years 2011, 2010 and 2009, approximately 40%, 35% and 44%, respectively, of our net sales were derived from product salesto our two primary distributors, Future Electronics Inc. (“Future”) and Nu Horizons Electronic Corp. (“Nu Horizons”); and approximately60%; 65% and 56%, respectively, of our net sales were derived from sales to other distributors, OEM customers and other non-distributors.
The following table shows net sales by channel in dollars and as a percentage of net sales for the periods indicated (in thousands, exceptpercentages):
Net sales from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18,2009 and March 17, 2010, respectively.
Fiscal Year 2011 versus Fiscal Year 2010
Net sales to our distributors, for which we recognize revenue on the sell-through basis, for fiscal year 2011 increased by $17.6 million.The increase in sales to these distributors was primarily due to higher sales of our interface and power products.
Net sales to direct customers and other distributors for fiscal year 2011 decreased by $6.5 million from fiscal year 2010. This decreasewas primarily attributable to the decrease in net sales in our datacom and storage products.
Fiscal Year 2010 versus Fiscal Year 2009
Net sales to our distributors, for which we recognize revenue on the sell-through basis, for fiscal year 2010 decreased by $1.2 millionfrom fiscal year 2009. Net sales to these distributors included $1.1 million in sales of Hifn products. The decrease in sales to these distributorswas primarily due to lower sales of our legacy communications and interface products.
Net sales to direct customers and other distributors for fiscal year 2010 increased by $21.0 million from fiscal year 2009 and included$26.6 million in sales of Hifn, Galazar and Neterion products. Net of the acquired products, net sales decreased $5.6 million during the periodprimarily due to lower sales of our legacy communications products.
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Net Sales by Geography
The following table shows net sales by geography in dollars and as a percentage of net sales for the periods indicated (in thousands,except percentages):
Net sales from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4, 2009, June 18,2009 and March 17, 2010, respectively.
Fiscal Year 2011 versus Fiscal Year 2010
Net sales in Asia in fiscal year 2011 increased $8.9 million as compared to fiscal year 2010 primarily due to higher shipments of ourinterface and power products.
Net sales in Europe in fiscal year 2011 increased $3.7 million as compared to fiscal year 2010 primarily due to higher shipments of ourinterface products.
Fiscal Year 2010 versus Fiscal Year 2009
Net sales in the Americas for fiscal year 2010 included $10.7 million, $1.1 million, and $0.2 million in sales of products acquired in theHifn, Galazar and Neterion acquisitions, respectively.
Net sales in Asia for fiscal year 2010 included $12.6 million and $1.0 million in sales of products acquired in the Hifn and Galazaracquisitions, respectively.
Net sales in Europe for fiscal year 2010 included $1.7 million and $0.3 million in sales of products acquired in the Hifn and Galazaracquisitions, respectively.
Gross Profit
The following table shows gross profit and cost of sales in dollars and as a percentage of net sales for the periods indicated (inthousands, except percentages):
March 27, 2011 March 28, 2010 March 29, 2009
2011 vs. 2010Change
2010 vs. 2009Change
Net sales $146,005 $134,878 $115,118
Cost of Sales
Cost of Sales 75,922 52% 63,911 47% 61,744 53% 19% 4% Fair value adjustment of acquired
Incremental net sales and gross profit from Hifn, Galazar and Neterion have been included in our consolidated financial statements sinceApril 4, 2009, June 18, 2009 and March 17, 2010, respectively.
Gross profit represents net sales less cost of sales. Cost of sales includes:
• the cost of purchasing finished silicon wafers manufactured by independent foundries;
• the costs associated with assembly, packaging, test, quality assurance and product yields;
• the cost of personnel and equipment associated with manufacturing support and engineering;
• the cost of stock-based compensation associated with manufacturing engineering and support personnel;
• the amortization of purchased intangible assets and acquired intellectual property;
• the fair value adjustment of acquired inventories;
• the provision for excess and obsolete inventory; and
• the sale of previously reserved inventory.
We believe that gross margin will fluctuate as a percentage of sales and in absolute dollars due to, among other factors, sales mix,manufacturing costs, our ability to leverage fixed operational costs across increased shipment volumes and competitive pricing pressure on ourproducts.
Fiscal Year 2011 versus Fiscal Year 2010
Gross profit as a percentage of net sales for fiscal year 2011 decreased 3 percentage points as compared to fiscal year 2010. The decreasein gross profit as a percentage of sales was primarily due to the write-off of inventory as a result of exiting the 10GbE network interface cardmarket, additional charges for other excess and obsolescence inventory, higher gold costs and product mix.
Stock-based compensation expense recorded in cost of sales was $0.5 million for both fiscal year 2011 and 2010.
Fiscal Year 2010 versus Fiscal Year 2009
Gross profit as a percentage of net sales for fiscal year 2010 increased $13.1 million, or three percentage points, as compared to fiscalyear 2009. The increase in gross profit as a percentage of sales was primarily due to sales of the Hifn and Galazar products that typically havehigher margins and improved manufacturing efficiency.
Stock-based compensation expense recorded in cost of sales was $0.5 million and $0.6 million for fiscal year 2010 and 2009,respectively.
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Other Costs and Expenses
The following table shows other costs and expenses in dollars and as a percentage of net sales for the periods indicated (in thousands,except percentages):
intangibles 1,143 1% 697 1% 490 — 64% 42% Acquisition related costs and
other 493 — 5,597 4% 1,756 2% (91%) 219% Total SG&A expense $ 45,432 31% $ 48,861 36% $ 38,962 34% (7%) 25% Goodwill and other intangible asset
impairment 7,485 5% — — 59,676 52% (100)% (100%)
Incremental net sales and operating expenses from Hifn, Galazar and Neterion have been included in our consolidated financialstatements since April 4, 2009, June 18, 2009 and March 17, 2010, respectively.
Research and Development (“R&D”)
Our research and development costs consist primarily of:
• the salaries, stock-based compensation, and related expenses of employees engaged in product research, design and developmentactivities;
• costs related to engineering design tools, mask tooling costs, software amortization, test hardware, and engineering supplies andservices;
• amortization of acquired intangible assets such as existing technology and patents/core technology; and
• facilities expenses.
We believe that research and development expenses will fluctuate as a percentage of sales and increase in absolute dollars due to, amongother factors, higher mask costs in connection with advanced process geometries, increased investment in software development, incentives,annual merit increases and fluctuations in reimbursements under a research and development contract.
We anticipate that salary related costs associated with the IPR&D project acquired in business combinations will be resourced throughour existing workforce.
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Fiscal Year 2011 versus Fiscal Year 2010
R&D-base expenses increased $1.8 million, or 4%, as compared to fiscal year 2010. The increase was primarily due to increased laborexpenses, software amortization and equipment depreciation associated with the acquisition of Neterion, partially offset by lower mask setscosts and outside services.
In connection with the Hifn acquisition, we assumed a contractual agreement under which certain of our research and development costsare eligible for reimbursement. Amounts collected under this arrangement are offset against research and development expense. During fiscalyear 2011, we received $5.0 million for work performed, which was recorded as an offset to research and development expenses. This was a$0.4 million increase as compared to fiscal year 2010.
The increase in stock-based compensation expense as compared to the same period a year ago was primarily due to award basedincentives to certain individuals.
The decrease in amortization expense—acquired intangibles as compared to fiscal year 2011 was result of the completion of theamortization period of an underlying intangible asset recorded in the Hifn acquisition.
Accelerated depreciation and other costs for fiscal year 2011 primarily reflect severance payments associated with the exiting of the10GbE network interface cards market.
Fiscal Year 2010 versus Fiscal Year 2009
R&D-base expenses increased $13.5 million, or 47%, as compared to fiscal year 2009. The increase was primarily due to increased laborexpenses, higher mask tooling costs and software amortization and equipment depreciation due to the growth of our company as a result of theacquisition of Hifn and Galazar.
As noted above, in connection with the Hifn acquisition, we assumed a contractual agreement under which certain of our research anddevelopment costs are eligible for reimbursement. During fiscal year 2010, Exar received $4.6 million for work performed, which wasrecorded as an offset to research and development expenses.
The increase in stock-based compensation expense as compared to the same period a year ago was primarily due to new stock option andrestricted stock unit grants made to Hifn and Galazar employees joining our company and the incremental costs associated with the employeestock option exchange in November 2008.
The growth in amortization expense—acquired intangibles as compared to fiscal year 2009 primarily relates to the amortization ofintangible assets associated with the Hifn and Galazar acquisitions.
Accelerated depreciation and other costs for fiscal year 2010 are primarily associated with acquired equipment and employee severancecosts in connection with our acquisitions.
Selling, General and Administrative (“SG&A”)
Selling, general and administrative expenses consist primarily of:
• salaries, stock-based compensation and related expenses;
• sales commissions;
• professional and legal fees;
• amortization of acquired intangible assets such as distributor relationships, tradenames/trademarks and customer relationships; and
• acquisition related costs.
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We believe that SG&A expenses will fluctuate as a percentage of sales and in absolute dollars due to, among other factors, variablecommissions, legal costs, incentives and annual merit increases.
Fiscal Year 2011 versus Fiscal Year 2010
SG&A-base expenses increased $0.7 million, or 2%, as compared to fiscal year 2010. The increase was primarily a result of an accrualfor a proposed amount to resolve a lease remediation claim and higher commissions and incentives.
The increase in stock-based compensation expense as compared to the same period a year ago was primarily due to award basedincentives to certain individuals and performance-based restricted stock units to our executive staff.
The increase in amortization expense-acquired intangibles relates to intangibles assets recorded in connection with the Neterionacquisition.
Acquisition related costs and other primarily reflect remaining payments on a Neterion facility located in Sunnyvale, California, whichwas vacated in the first quarter of fiscal 2011.
Fiscal Year 2010 versus Fiscal Year 2009
SG&A-base expenses increased $5.5 million, or 16%, in fiscal year 2010 as compared to fiscal year 2009. The increase was primarilydue to increased labor expenses and equipment depreciation due to the growth of our company as a result of the acquisition of Hifn, and to alesser extent, Galazar.
The increase in stock-based compensation expense as compared to the same period a year ago was primarily due to new stock option andrestricted stock unit grants made to Hifn and Galazar employees joining our company and the incremental costs associated with the employeestock option exchange in November 2008.
Acquisition related costs and other increased $3.8 million as compared to fiscal year 2009. The increase was primarily due to higherprofessional fees that are recorded as expenses related to business combinations and the accelerated depreciation of $0.8 million relating toshortened remaining lives of equipment acquired from Hifn, employee separation costs of $0.8 million, and building exit and moving costs of$0.3 million related to the Hifn Los Gatos facility.
Goodwill and Other Intangible Asset Impairment
Fiscal Year 2011
In the fourth quarter of fiscal year 2011, we conducted our annual impairment review comparing the fair value of our single reportingunit with its carrying value. As of the test date and as of year-end, and before consideration of a control premium, the fair value, which wasestimated as our market capitalization, exceeded the carrying value of our net assets. As a result, no impairment was recorded for fiscal year2011.
During the fourth quarter of fiscal year 2011, we decided to exit the data center virtualization market, and, in connection therewith, todiscontinue development of our 10GbE network interface cards. We determined that the current economic and market environment did notprovide the potential to deliver acceptable returns on the required investments in these products. As a result, in the fourth quarter of fiscal year2011, we abandoned all related in-process research and development. In addition, we began to actively market for sale the related assets of our10GbE technology, consisting primarily of underlying existing and core technology intangible assets. Charges related to this decision in thefourth quarter of fiscal year 2011 included $7.5 million for the impairment of intangible assets, which is included within the impairment ofintangible assets and goodwill line in our consolidated statements of operations.
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The intangible asset impairment charge of $7.5 million consists of $0.8 million to write-off abandoned IPR&D and $6.7 million to write-down the carrying value of intangible assets that are held for sale to $0.2 million at March 27, 2011, which represents their estimated fair valueless cost to sell based on third party bids received to date. In June 2011, we completed the asset sale process and received $0.2 million, net ofselling costs.
Fiscal Year 2010
In the fourth quarter of fiscal year 2010, we conducted our annual impairment review comparing the fair value of our single reportingunit with its carrying value. As of the test date and as of year-end, and before consideration of a control premium, the fair value, which wasestimated as our market capitalization, exceeded the carrying value of our net assets. As a result, no additional measurement was needed andno impairment was recorded for fiscal year 2010.
Fiscal Year 2009
During fiscal year 2009, a rapid and severe deterioration of worldwide economic conditions affected our industry and led customers toscale down their levels of production. As a result of third quarter fiscal year 2009 impairment indicators, we considered the potentialimpairment of goodwill and other long-lived assets including intangible assets. Indicators that required us to perform an interim impairmentreview consisted of further weakening in new orders from our customers throughout the third quarter and into the fourth quarter of fiscal year2009, as well as the uncertainty of the magnitude and duration of the recession and expectations of industry analysts that demand forsemiconductors would remain weak until economic conditions improved. In addition, we experienced a significant decline in our stock pricethat reduced our market capitalization below our net asset carrying value for an extended period of time. As a result of the goodwill and long-lived asset impairment assessments, we recorded a charge totaling $59.7 million in the third quarter of fiscal year 2009. This charge iscomprised of $46.2 million related to goodwill and $13.5 million related to intangible assets, which is included in the impairment of intangibleassets and goodwill line in the consolidated statements of operations.
Given the impairment indicators discussed above, we performed an interim goodwill impairment analysis during the third quarter offiscal year 2009 using a combination of the income approach and the market approach. The analysis performed compared the implied fair valueof goodwill to the carrying amount of goodwill on our balance sheet. Our estimate of the implied fair value of the goodwill was based on thequoted market price of our common stock and the discounted value of estimated future cash flows over a seven-year period with residualvalue. The analysis resulted in an impairment charge of approximately $46.2 million, which is included in the impairment of intangible assetsand goodwill line in the consolidated statements of operations, that reduced our carrying value of goodwill to zero.
Solely for the purposes of establishing inputs for the fair value calculations described above related to goodwill impairment testing, wemade the following assumptions. We assumed that the current economic recession would continue through fiscal year 2010, followed by arecovery period in fiscal years 2011 through 2013 and long-term industry growth past fiscal year 2013. In addition, we applied gross marginassumptions consistent with our historical trends and used a 3% growth factor to calculate the terminal value of the company, which wasconsistent with the rate used in the prior year’s annual impairment test. We used a 14% discount rate to calculate the present value of cashflows and the terminal value, which is slightly higher than the 12.5% discount rate we used in the prior year’s annual impairment test,primarily due to increases to the required market risk and small stock premiums.
Given the impairment indicators discussed above, we also performed a test of purchased intangible assets for recoverability. Theassessment of recoverability was based upon the assumptions and underlying cash flow projections prepared for the concurrent interimgoodwill impairment test. Our estimate of the implied fair value of the intangible assets was based on the discounted value of estimated futurecash flows over a five-year period using a discount rate of 14%.
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The analysis determined that the carrying amount of the intangible assets exceeded the implied fair value and the difference was allocatedto the intangible assets of the impacted asset group on a pro-rata basis using the relative carrying amounts of the assets. We recorded animpairment charge of approximately $13.5 million, which is included in the impairment of intangible assets and goodwill line in theconsolidated statements of operations, of which $9.8 million related to existing technology, $1.4 million to patents/core technology, $1.3million to distributor relationships, $0.9 million to customer relationships and $0.1 million to tradenames/trademarks.
Other Income and Expenses
The following table shows other income and expenses in dollars and as a percentage of net sales for the periods indicated (in thousands,except percentages):
March 27, 2011 March 28, 2010 March 29, 2009
2011 vs. 2010Change
2010 vs. 2009Change
Net sales $146,005 $134,878 $115,118
Interest income and other, net 5,925 4% 7,030 5% 9,693 8% (16%) (27%) Interest expense (1,258) (1%) (1,296) (1%) (1,253) (1%) (3%) 3% Impairment charges on investments (62) — (317) — (1,789) (2%) (80%) (82%)
Interest Income and Other, Net
Interest income and other, net primarily consists of:
• interest income;
• sublease income;
• foreign exchange gains or losses; and
• realized gains or losses on marketable securities.
Fiscal Year 2011 versus Fiscal Year 2010
The $1.1 million, or 16%, decrease in interest income and other, net during fiscal year 2011 as compared to fiscal year 2010 wasprimarily attributable to a decrease in interest income as a result of lower invested cash balances and lower yield of the investments.
Our sublease income for fiscal 2011 was $1.3 million and was related to the sublet of our Hillview facility located in Milpitas, California(the “Hillview Facility”) that was assumed in connection with the acquisition of Sipex Corporation (“Sipex”) in August 2007. The subleaseagreement terminated on March 31, 2011 and, as a result, we anticipate interest income and other, net to decrease by $1.3 million in the future.
Fiscal Year 2010 versus Fiscal Year 2009
The $2.7 million, or 27%, decrease in interest income and other, net during fiscal year 2010 as compared to fiscal year 2009 wasprimarily attributable to a decrease in interest income as a result of lower invested cash balances and lower yield of the investments.
Interest Expense
In connection with the Sipex acquisition, we assumed a lease financing obligation related to the Hillview Facility. The fair value of theHillview Facility was estimated at $13.4 million at the time of the acquisition and was included in the property, plant and equipment, net lineon the consolidated balance sheet. In accordance with
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purchase accounting, we have accounted for this sale and leaseback transaction as a financing transaction which was included in the long-termlease financing obligations line on our consolidated balance sheet. The effective interest rate is 8.2%. At the end of the lease term, March 31,2011, the lease obligation was settled by returning the Hillview Facility to the lessor. In fiscal year 2011, we recorded $1.0 million in interestexpense related to the Hillview Facility, and with the return of the building to the lessor, we expect that interest expense will decrease by thesame amount in the future.
Impairment Charges on Investments
We periodically review and determine whether our investments with unrealized loss positions are other-than-temporarily impaired. Thisevaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings,collateralized support, the length of time and significance of a security’s loss position, our intent to not sell the security, and whether it is morelikely than not that we will not have to sell the security before recovery of its cost basis. Realized gains or losses on the sale of marketablesecurities are determined by the specific identification method and are reflected in the interest income and other, net line on the consolidatedstatements of operations. Other-than-temporary declines in value of our investments both marketable and non-marketable, judged to be other-than-temporary, are reported in the impairment charges on investments line in the consolidated statements of operations.
In fiscal year 2010, an investment in GSAA Home Equity with a cost of $425,000 was downgraded from an AAA rating to a CCCrating. As a result of the reduction in the rating, quantitative analysis showing an increase in the default rate and decrease in prepayment rate ofthe investment, we recorded an other-than-temporary impairment charge of $91,000 during the second quarter of fiscal year 2010. In the threemonths ended September 26, 2010, due to further decline in the investment, we recorded an additional other-than-temporary impairmentcharge of $62,000. In the three months ended December 26, 2010, we sold this investment resulting in an immaterial loss from its adjustedbasis.
In September 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code with theU.S. Bankruptcy Court for the Southern District of New York. As a result of Lehman’s bankruptcy filing, we recorded an other-than-temporary impairment charge of $0.6 million during fiscal year 2009. In the three months ended March 27, 2011, we sold this investmentresulting in an immaterial gain from its adjusted basis.
Our long-term investment consists of our investment in Skypoint Telecom Fund II (US), L.P. (“Skypoint Fund”). Skypoint Fund is aventure capital fund that invests primarily in private companies in the telecommunications and/or networking industries. We account for thisnon-marketable equity investment under the cost method. We periodically review and determine whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value. Any decline in the value of our non-marketableinvestments is reported in the impairment charges on investments line in the consolidated statements of operations.
We also have a long-term investment in TechFarm Ventures L.P. (“TechFarm Fund”), another venture capital fund that invests primarilyin private companies in the telecommunications and/or networking industries, to which we had contributed our total commitment to the fund of$4.0 million in capital since we became a limited partner in May 2001. However, this investment had a carrying amount of zero as ofMarch 27, 2011 and March 28, 2010, reflecting the net of the capital contribution and the cumulative impairment charges.
TechFarm Fund
In fiscal year 2009, we analyzed the fair value of the underlying investment in TechFarm Fund and concluded that the remaining carryingvalue in TechFarm Fund was other-than-temporarily impaired and recorded an impairment charge of $0.5 million. As such, we reduced thecarrying value of our investment in TechFarm Fund to zero.
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Skypoint Fund
In fiscal year 2011, we analyzed the fair value of the underlying investments of Skypoint Fund and concluded that there was noimpairment of the carrying value of our investment in the fund.
In fiscal year 2010, we analyzed the fair value of the underlying investments of Skypoint Fund and concluded a portion of the carryingvalue was other-than-temporarily impaired and recorded an impairment charge of $0.2 million.
In fiscal year 2009, we analyzed the fair value of the underlying investments of Skypoint Fund and concluded a portion of the carryingvalue was other-than-temporarily impaired and recorded an impairment charge of $0.7 million.
Provision for Income Taxes
Fiscal Year 2011
Our effective tax rate for fiscal year 2011 was (0.7%). The provision for fiscal year 2011 differs from the amount computed by applyingthe statutory federal rate of 35%. This difference is principally due to our not benefitting from deferred tax assets as a result of increases invaluation allowances during fiscal year 2011.
Fiscal Year 2010
Our effective tax rate for fiscal year 2010 was 1.6%. The provision for fiscal year 2010 differs from the amount computed by applyingthe statutory federal rate of 35%. This difference is principally due to changes in valuation allowance, federal refundable tax credit benefits,foreign rate differential, true-up adjustment of prior year tax expense and net operating loss benefits during fiscal year 2010.
Fiscal Year 2009
Our effective tax rate for fiscal year 2009 was 0.7%. The provision for fiscal year 2009 differs from the amount computed by applyingthe statutory federal rate of 35%. This difference is principally due to changes in valuation allowance and net operating loss benefits duringfiscal year 2009.
LIQUIDITY AND CAPITAL RESOURCES Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
(dollars in thousands)
Cash and cash equivalents $ 15,039 $ 25,486 $ 89,002 Short-term investments 185,960 186,598 167,341 Total cash, cash equivalents, and short-term investments $200,999 $212,084 $256,343 Percentage of total assets 67% 64% 76% Net cash (used in) provided by operating activities $ (2,962) $ 3,641 $ 3,268 Net cash used in investing activities (4,731) (64,594) (25,038) Net cash used in financing activities (2,754) (2,563) (11,244) Net decrease in cash and cash equivalents $ (10,447) $ (63,516) $ (33,014)
Fiscal Year 2011
Operating Activities—Our net loss was $35.7 million in fiscal year 2011. After adjustments for non-cash items and changes in workingcapital, we used $3.0 million of cash from operating activities.
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Significant non-cash charges included:
• Depreciation and amortization expenses of $19.4 million;
• Intangible assets and goodwill impairment of $7.5 million; and
• Stock-based compensation expense of $7.4 million.
Working capital changes included:
• a $4.8 million decrease in accounts receivable primarily due to lower shipments and improved collections;
• a $7.0 million increase in inventory primarily due to higher material receipts for our datacom and storage and power products inanticipation of higher future shipments of our new products and the impact of the semiconductor industry’s inventory correction; and
• a $2.8 million decrease in other current and non-current assets primarily as a result of a tax refund.
Investment Activities—In fiscal year 2011, net cash used in investing activities includes net purchases of short-term marketable securitiesof $0.9 million and $3.7 million in purchases of property, plant and equipment and intellectual property.
Financing Activities—In fiscal year 2011, net cash used in financing activities reflects the $4.0 million repayment of lease financingpartially offset by $1.2 million of proceeds associated with our employee stock plans.
From time to time, we acquire outstanding common stock in the open market to partially offset dilution from our equity award programs,to increase our return on our invested capital and to bring our cash to a more appropriate level for our company.
On August 28, 2007, we announced the approval of a share repurchase plan (“2007 SRP”) and authorized the repurchase of up to $100million of our common stock.
During fiscal years 2011 and 2010, we did not repurchase any shares of our common stock.
As of March 27, 2011, the remaining authorized amount for share repurchases under the 2007 SRP was $11.8 million. The 2007 SRPdoes not have a termination date. We may continue to utilize our share repurchase plan, which would reduce our cash, cash equivalents and/orshort-term marketable securities available to fund future operations and to meet other liquidity requirements.
To date, inflation has not had a significant impact on our operating results.
We anticipate that we will finance our operations with expected cash flows from operations, existing cash and investment balances, andsome combination of long-term debt and/or lease financing and additional sales of equity securities. The combination and sources of capitalwill be determined by management based on our needs and prevailing market conditions.
Fiscal Year 2010
Operating Activities—Our net loss was $28.1 million. After adjustments for non-cash items and changes in working capital, wegenerated $3.6 million of cash from operating activities.
Significant non-cash charges included:
• Depreciation and amortization expenses of $20.8 million;
• Stock-based compensation expense of $6.0 million; and
• Losses on investments of $0.3 million.
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Working capital changes included:
• a $5.1 million increase in accounts receivable primarily due to higher shipments;
• a $2.5 million increase in accounts payable primarily due to the increased number of vendors and related activity due to acquisitions;and
• a $4.2 million increase in deferred income and allowances on sales to distributors as our distributors have increased their inventory inresponse to improving end customer demand.
Investment Activities—In fiscal year 2010, net cash used in investing activities includes acquisitions of Hifn, Galazar and Neterion for$53.3 million, net purchases of short-term marketable securities of $5.4 million and $5.8 million in purchases of property, plant and equipmentand intellectual property.
Financing Activities—In fiscal year 2010, net cash used in financing activities reflects the $3.1 million repayment of lease financingpartially offset by $0.5 million of proceeds associated with our employee stock plans.
Fiscal Year 2009
Operating Activities—Our net loss was $73.0 million. After adjustments for non-cash items and changes in working capital, wegenerated $3.3 million of cash from operating activities.
Significant non-cash charges included:
• Goodwill and other intangible assets impairment charge of $59.7 million;
• Depreciation and amortization expenses of $14.4 million;
• Stock-based compensation expense of $4.9 million; and
• Losses on investments of $1.8 million.
Working capital changes included:
• a $4.4 million decrease in accounts receivable primarily due to lower shipments in the period;
• a $3.4 million decrease in accounts payable primarily due to reduced purchases of inventory; and
• a $1.7 million decrease in deferred income and allowances on sales to distributors as our distributors have reduced their inventory inresponse to reduced end customer demand.
Investment Activities—In fiscal year 2009, net cash used in investing activities includes net purchases of short-term marketable securitiesof $22.6 million and $2.3 million in purchases of property, plant and equipment and intellectual property.
Financing Activities—In fiscal year 2009, net cash used in financing activities reflects the repurchase of 1.6 million shares of ourcommon stock in fiscal year 2009 for $13.4 million and the $1.3 million repayment of lease financing partially offset by $3.5 million ofproceeds associated with our employee stock plans.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 27, 2011, we had not utilized special purpose entities to facilitate off-balance sheet financing arrangements. However, wehave, in the normal course of business, entered into agreements which impose warranty obligations with respect to our products or whichobligate us to provide indemnification of varying scope and terms to customers, vendors, lessors and business partners, our directors andexecutive officers, purchasers of assets or subsidiaries, and other parties with respect to certain matters. These arrangements may
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constitute “off-balance sheet transactions” as defined in Section 303(a)(4) of Regulation S-K. Please see “Notes to the Consolidated FinancialStatements, Note 16—Commitments and Contingencies” for further discussion of our product warranty liabilities and indemnificationobligations.
As discussed in “Notes to the Consolidated Financial Statements, Note 16—Commitments and Contingencies”, during the normalcourse of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certaintransactions. These indemnities include non-infringement of patents and intellectual property, indemnities to our customers in connection withthe delivery, design, manufacture and sale of our products, indemnities to our directors and officers in connection with legal proceedings,indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to otherparties to certain acquisition agreements. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. Webelieve that substantially all of our indemnities and commitments provide for limitations on the maximum potential future payments we couldbe obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities and commitmentsbecause such liabilities are contingent upon the occurrence of events which are not reasonably determinable. We believe that any liability forthese indemnities and commitments would not be material to our accompanying consolidated financial statements.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our contractual obligations and commitments at March 27, 2011 were as follows (in thousands): Payments due by period
Total $25,750 $20,737 $3,556 $1,457 $ — Note: The table above excludes the liability for unrecognized income tax benefits of approximately $3.7 million, which includes accrued
interest and penalties of approximately $0.3 million as of March 27, 2011, since we cannot predict with reasonable reliability the timingof cash settlements with the respective taxing authorities.
(1) We place purchase orders with wafer foundries and other vendors as part of our normal course of business. We expect to receive and payfor wafers, capital equipment and various service contracts over the next 12 months from our existing cash balances.
(2) Includes $2.1 million related to engineering design software licenses purchased under capital leases but excludes approximately $12.2million final obligation related to settling the Hillview lease by returning the facility to lessor on March 31, 2011.
(3) Includes $5.7 million related to leased engineering design software licenses and $1.5 million related to office space leased around theworld.
(4) The commitment related to the Skypoint Fund does not have a set payment schedule and thus will become payable upon request from theFund’s General Partner up through June 30, 2011.
(5) The commitment relates to the environmental monitoring and remediation activities of Micro Power Systems, Inc.
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Part II, Item 8—“Financial Statements and Supplementary Data” and “Notes to Consolidated Financial Statements,Note 2—Accounting Policies.”
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Fluctuations. We are exposed to foreign currency fluctuations primarily through our foreign operations. Thisexposure is the result of foreign operating expenses being denominated in foreign currency. Operational currency requirements are typicallyforecasted for a one-month period. If there is a need to hedge this risk, we may enter into transactions to purchase currency in the open marketor enter into forward currency exchange contracts.
If our foreign operations forecasts are overstated or understated during periods of currency volatility, we could experience unanticipatedcurrency gains or losses. For fiscal years 2011 and 2010, we did not have significant foreign currency denominated net assets or net liabilitiespositions, and had no foreign currency contracts outstanding.
Investment Risk and Interest Rate Sensitivity. We maintain investment portfolio holdings of various issuers, types, and maturity dateswith various banks and investment banking institutions. The market value of these investments on any given day during the investment termmay vary as a result of market interest rate fluctuations. Our investment portfolio consisted of cash equivalents, money market funds and fixedincome securities of $193.4 million as of March 27, 2011 and $206.2 million as of March 28, 2010. These securities, like all fixed incomeinstruments, are subject to interest rate risk and will vary in value as market interest rates fluctuate. If market interest rates were to increase ordecline immediately and uniformly by less than 10% from levels as of March 27, 2011, the increase or decline in the fair value of the portfoliowould not be material. At March 27, 2011, the difference between the fair value and the underlying cost of the investments portfolio was a netunrealized gain of $0.5 million.
Our short-term investments are classified as “available-for-sale” securities and the cost of securities sold is based on the specificidentification method. At March 27, 2011, short-term investments consisted of asset and mortgage-backed securities, corporate bonds andgovernment agency securities totaling $186.0 million.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Report of Independent Registered Public Accounting Firm 60 Consolidated Balance Sheets 61 Consolidated Statements of Operations 62 Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) 63 Consolidated Statements of Cash Flows 64 Notes to Consolidated Financial Statements 65
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Exar Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equityand comprehensive income (loss), and of cash flows present fairly, in all material respects, the financial position of Exar Corporation and itssubsidiaries at March 27, 2011 and March 28, 2010, and the results of their operations and their cash flows for each of the three years in theperiod ended March 27, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in ouropinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 27, 2011, based oncriteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sAnnual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesefinancial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal controlover financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsalso included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide areasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.
Cash and cash equivalents $ 15,039 $ 25,486 Short-term marketable securities 185,960 186,598 Accounts receivable (net of allowances of $1,165 and $831) 9,776 13,461 Accounts receivable, related party (net of allowances of $358 and $605) 3,194 4,323 Inventories 21,962 15,000 Other current assets 3,562 5,106
Total current assets 239,493 249,974 Property, plant and equipment, net 38,009 42,941 Goodwill 3,184 3,085 Intangible assets, net 15,390 31,957 Other non-current assets 2,139 5,357
Total assets $ 298,215 $ 333,314
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 8,794 $ 9,828 Accrued compensation and related benefits 6,069 6,619 Deferred income and allowances on sales to distributors 4,632 4,227 Deferred income and allowances on sales to distributor, related party 10,680 10,650 Short-term lease financing obligations 1,681 3,540 Other accrued expenses 5,381 7,058
Total current liabilities 37,237 41,922 Long-term lease financing obligations 12,558 13,454 Other non-current obligations 3,841 3,806
Total liabilities 53,636 59,182 Commitments and contingencies (Notes 16 and 17)
Stockholders’ equity:
Preferred stock, $.0001 par value; 2,250,000 shares authorized; no shares outstanding — — Common stock, $.0001 par value; 100,000,000 shares authorized; 44,519,663 and 43,839,514 shares
outstanding at March 27, 2011 and March 28, 2010, respectively 4 4 Additional paid-in capital 728,139 720,455 Accumulated other comprehensive income (loss) (287) 1,282 Treasury stock at cost, 19,924,369 shares at March 27, 2011 and March 28, 2010 (248,983) (248,983) Accumulated deficit (234,294) (198,626)
Total stockholders’ equity 244,579 274,132 Total liabilities and stockholders’ equity $ 298,215 $ 333,314
See accompanying notes to consolidated financial statements.
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EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Sales:
Net sales $101,721 $ 97,676 $ 74,620 Net sales, related party 44,284 37,202 40,498
Total net sales 146,005 134,878 115,118 Cost of sales:
Cost of sales 54,992 48,728 41,811 Cost of sales, related party 20,972 17,581 19,933 Amortization of purchased intangible assets 6,044 5,187 3,129
Total cost of sales 82,008 71,496 64,873 Gross profit 63,997 63,382 50,245 Operating expenses:
Research and development 51,098 48,511 31,829 Selling, general and administrative 45,432 48,861 38,962 Impairment of intangible assets and goodwill 7,485 — 59,676
Total operating expenses 104,015 97,372 130,467 Loss from operations (40,018) (33,990) (80,222) Other income and expense, net:
Interest income and other, net 5,925 7,030 9,693 Interest expense (1,258) (1,296) (1,253) Impairment charges on investments (62) (317) (1,789)
Total other income and expense, net 4,605 5,417 6,651 Loss before income taxes (35,413) (28,573) (73,571) Provision for (benefit from) income taxes 255 (463) (535) Net loss $ (35,668) $ (28,110) $ (73,036) Loss per share:
Basic and diluted loss per share $ (0.81) $ (0.64) $ (1.70) Shares used in the computation of loss per share:
Basic and diluted 44,218 43,584 42,887
See accompanying notes to consolidated financial statements.
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EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)(In thousands, except share amounts)
Common Stock Treasury Stock
AdditionalPaid–in-Capital
AccumulatedDeficit
AccumulatedOther
Compre-hensiveIncome(Loss)
TotalStockholders’
Equity Shares Amount Shares Amount Balance, March 30, 2008 62,216,783 $ 4 (18,288,021) $(235,538) $ 702,218 $ (97,480) $ 1,873 $ 371,077 Comprehensive loss: Net loss (73,036) (73,036) Other comprehensive income: Change in unrealized gains on marketable
securities, including tax of $485 (1,071) (1,071) Total comprehensive loss $ (74,107)
Reclassification of deferred compensationliability 210 210
Issuance of common stock through employeestock plans 635,959 3,518 3,518
Issuance of common stock for vested restrictedstock units 117,437
Withholding of common shares for taxobligations on vested restricted stock units (9,539) (60) (60)
Stock-based compensation 4,901 4,901 Acquisition of treasury stock (1,636,348) (13,445) (13,445) Balance, March 29, 2009 62,960,640 $ 4 (19,924,369) $(248,983) $ 710,787 $ (170,516) $ 802 $ 292,094 Comprehensive loss: Net loss (28,110) (28,110) Other comprehensive income: Change in unrealized gains on marketable
securities, including tax of $289 480 480 Total comprehensive loss $ (27,630)
Issuance of common stock through employeestock plans 83,553 538 538
Issuance of common stock in connection with Hifnacquisition 418,026 2,709 2,709
Deferred salary option adjustment, net 1,325 20 20 Issuance of common stock for vested restricted
stock units 349,409 3 3 Withholding of common shares for tax
obligations on vested restricted stock units (49,070) (347) (347) Tax benefit from stock plans 780 780 Stock-based compensation 5,965 5,965 Balance, March 28, 2010 63,763,883 $ 4 (19,924,369) $(248,983) $ 720,455 $ (198,626) $ 1,282 $ 274,132 Comprehensive loss: Net loss (35,668) (35,668) Other comprehensive loss: Change in unrealized gains on marketable
securities, including tax of $0 (1,569) (1,569) Total comprehensive loss $ (37,237)
Issuance of common stock through employeestock plans 195,087 1,208 1,208
Issuance of common stock in connection with Hifnacquisition 4,196 27 27
Issuance of common stock for vested restrictedstock units 619,561
Withholding of common shares for taxobligations on vested restricted stock units (138,695) (969) (969)
See accompanying notes to consolidated financial statements.
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EXAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Cash flows from operating activities:
Net loss $ (35,668) $ (28,110) $ (73,036) Reconciliation of net loss to net cash provided by (used in) operating activities:
Intangible assets impairment and goodwill 7,485 — 59,676 Depreciation and amortization 19,414 20,825 14,446 Stock-based compensation expense 7,381 5,965 4,934 Other than temporary loss on investments 62 317 1,789 Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable and accounts receivable, related party 4,814 (5,121) 4,407 Inventories (6,962) 6,256 (1,510) Other current and non-current assets 2,756 (204) 819 Accounts payable (1,202) 2,473 (3,410) Accrued compensation and related benefits (1,495) (925) (1,032) Other accrued expenses (245) (2,030) (2,205) Income taxes payable 263 — 94 Deferred income and allowance on sales to distributors and related party
distributor 435 4,195 (1,704) Net cash (used in) provided by operating activities (2,962) 3,641 3,268
Cash flows from investing activities:
Purchases of property, plant and equipment and intellectual property, net (3,656) (5,830) (2,255) Purchases of short-term marketable securities (157,609) (166,229) (264,087) Proceeds from maturities of short-term marketable securities 74,459 114,414 199,064 Proceeds from sales of short-term marketable securities 82,294 46,426 42,467 Other investment activities (219) (42) (227) Acquisition of Neterion, net of cash acquired — (8,544) — Acquisition of Galazar, net of cash acquired — (4,445) — Acquisition of Hifn, net of cash acquired — (40,344) —
Net cash used in investing activities (4,731) (64,594) (25,038) Cash flows from financing activities:
Repurchase of common stock — — (13,445) Proceeds from issuance of common stock 1,208 541 3,518 Repayment of lease financing obligations (3,962) (3,104) (1,317)
Net cash used in financing activities (2,754) (2,563) (11,244) Net decrease in cash and cash equivalents (10,447) (63,516) (33,014) Cash and cash equivalents at the beginning of period 25,486 89,002 122,016 Cash and cash equivalents at the end of period $ 15,039 $ 25,486 $ 89,002 Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock in connection with Hifn acquisition 27 2,709 — Cash paid for income taxes 179 185 164 Cash received from income taxes refund 3,078 — — Cash paid for interest 1,289 1,327 1,200 Property, plant and equipment acquired under capital lease 1,808 2,012 2,571
See accompanying notes to consolidated financial statements.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010 AND MARCH 29, 2009
NOTE 1. DESCRIPTION OF BUSINESS
Exar Corporation was incorporated in California in 1971 and reincorporated in Delaware in 1991. Exar Corporation and its subsidiaries(“Exar” or “we”) is a fabless semiconductor company that designs, sub-contracts manufacturing and sells highly differentiated silicon,software and subsystem solutions for industrial, telecom, networking and storage applications.
On March 16, 2010, we completed the acquisition of Neterion, Inc. (“Neterion”), a supplier of 10 Gigabit Ethernet (“GbE”) controllersilicon and card solutions optimized for virtualized data centers located in Sunnyvale, California.
On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (“Galazar”), a fabless semiconductor company focused oncarrier grade transport over telecom networks based in Ottawa, Ontario, Canada. Galazar’s product portfolio addressed transport of a widerange of datacom and telecom services including Ethernet, SAN, TDM and video over SONET/SDH, PDH and OTN networks.
On April 3, 2009, we completed the acquisition of hi/fn, inc. (“Hifn”), a provider of network-and storage-security and data reductionproducts located in Los Gatos, California.
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year’s presentation.Such reclassification had no effect on previously reported results of operations or stockholders’ equity.
NOTE 2. ACCOUNTING POLICIES
Basis of Presentation—Our fiscal years consist of 52 or 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. Thethree fiscal years 2011, 2010 and 2009 are each comprised of 52-weeks. Fiscal year 2012 will consist of 53 weeks.
Principles of Consolidation—The consolidated financial statements include the accounts of Exar Corporation and its wholly-ownedsubsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Management Estimates—The preparation of consolidated financial statements in conformity with generally accepted accountingprinciples in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates,including (1) revenue recognition; (2) valuation of inventories; (3) income taxes; (4) stock-based compensation; (5) goodwill; and (6) long-lived assets. Actual results could differ from these estimates and material effects on operating results and financial position may result.
Business Combinations—The estimated fair value of acquired assets and assumed liabilities and the results of operations of acquiredbusinesses are included in our consolidated financial statements from the effective date of the purchase. The total purchase price is allocated tothe estimated fair value of assets acquired and liabilities assumed. (See Note 3—“Business Combinations.”)
Cash and Cash Equivalents—We consider all highly liquid debt securities and investments with maturities of 90 days or less from thedate of purchase to be cash and cash equivalents. Cash and cash equivalents also consist of cash on deposit with banks and money marketfunds.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
Inventories—Inventories are recorded at the lower of cost or market, determined on a first-in, first-out basis. Cost is computed using thestandard cost, which approximates average actual cost. Inventory is written down when conditions indicate that the selling price could be lessthan cost due to physical deterioration, obsolescence, changes in price levels, or other causes. The write-down of excess inventories isgenerally based on inventory levels in excess of twelve months of demand, as judged by management, for each specific product.
Property, Plant and Equipment—Property, plant and equipment, including assets held under capital leases and leasehold improvements,are stated at cost less accumulated depreciation and amortization. Depreciation for machinery and equipment is computed using the straight-linemethod over the estimated useful lives of the assets, which ranges from three to ten years. Buildings are depreciated using the straight-linemethod over an estimated useful life of 30 years. Assets held under capital leases and leasehold improvements are amortized over the shorterof the terms of the leases or their estimated useful lives. Land is not depreciated.
Non-Marketable Equity Securities—Non-marketable equity investments are accounted for at historical cost and are presented on ourconsolidated balance sheets within other non-current assets.
Other-Than-Temporary Impairment—All of our marketable and non-marketable investments are subject to periodic impairmentreviews. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary, as follows:
Marketable investments—When the resulting fair value is significantly below cost basis and/or the significant decline has lasted for anextended period of time, we perform an evaluation to determine whether the marketable equity security is other than temporarily impaired. Theevaluation that we use to determine whether a marketable equity security is other than temporarily impaired is based on the specific facts andcircumstances present at the time of assessment, which include significant quantitative and qualitative assessments and estimates regardingcredit ratings, collateralized support, the length of time and significance of a security’s loss position and intent and ability to hold a security tomaturity or forecasted recovery. Other-than-temporary declines in value of our investments are reported in the impairment charges oninvestments line in the consolidated statements of operations.
Non-marketable equity investments—When events or circumstances are identified that would likely have a significant adverse effect onthe fair value of the investment and the fair value is significantly below cost basis and/or the significant decline has lasted for an extendedperiod of time, we perform an impairment analysis. The indicators that we use to identify those events and circumstances include:
• the investment manager’s evaluation;
• the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects;
• the technological feasibility of the investee’s products and technologies;
• the general market conditions in the investee’s industry; and
• the investee’s liquidity, debt ratios and the rate at which the investee is using cash.
Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other thantemporarily impaired, and if so, the investment is written down to its impaired value. When an investee is not considered viable from afinancial or technological point of view, the entire investment is written down. Impairment of non-marketable equity investments is recorded inthe impairment charges on investments line in the consolidated statements of operations.
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assetsacquired in a business combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes incircumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level bycomparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting unitsare estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilize comparablecompanies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step isperformed to measure the amount of impairment loss, if any. Because we have one reporting unit, we utilize the entity-wide approach to assessgoodwill for impairment. During our annual goodwill impairment analysis in the fourth quarters of fiscal year 2011 and fiscal year 2010, fairvalue exceeded carrying value and no impairment was recorded.
In the third quarter of fiscal year 2009, the rapid and severe deterioration of worldwide economic conditions affected our industry andled customers to scale down their levels of production. As a result of these impairment indicators, we considered the potential impairment ofgoodwill. Indicators that required us to perform an interim impairment review consisted of further weakening in new orders from ourcustomers throughout the third quarter and into the fourth quarter of fiscal year 2009, as well as the uncertainty of the magnitude and durationof the recession as evidenced by industry analysts expectations that demand for semiconductors would remain weak until economic conditionsimprove. In addition, we experienced a significant decline in our stock price that reduced our market capitalization below our net asset carryingvalue for an extended period of time. We performed an interim goodwill impairment analysis and recorded a $46.2 million impairment loss thatwas included in the impairment of intangible assets and goodwill line in the consolidated statements of operations. (See “Note 9—Goodwilland Intangible Assets”).
Long-Lived Assets—We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carryingvalue of the assets or the asset grouping may not be recoverable. Factors that we consider in deciding when to perform an impairment reviewinclude significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. These factors canalso be referred to as triggering events. We measure the recoverability of assets that will continue to be used in our operations by comparingthe carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. If an asset grouping’s carryingvalue is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment ismeasured by comparing the difference between the asset grouping’s carrying value and its fair value. Long-lived assets such as goodwill;intangible assets; and property, plant and equipment are considered non-financial assets, and are recorded at fair value only if an impairmentcharge is recognized.
Impairments of long-lived assets are determined for groups of assets related to the lowest level of identifiable independent cash flows.We operate with one asset group on an enterprise basis. As a result, we believe the lowest identifiable cash flows reside at the enterprise level.
When we determine that the useful lives of assets are shorter than we had originally estimated, we accelerate the rate of depreciationand/or amortization over the assets’ new, shorter useful lives.
Substantially all of our property, plant and equipment and other long-lived assets are located in the United States.
In-process research and development—In-process research and development (“IPR&D”) assets are considered indefinite-livedintangible assets and are not subject to amortization until their useful life is
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EXAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
determined. IPR&D assets must be tested for impairment annually or more frequently if events or changes in circumstances indicate that theasset might be impaired. The impairment test consists of a comparison of the fair value of the IPR&D assets with their carrying values. If thecarrying amount of the IPR&D asset exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess. After animpairment loss is recognized, the adjusted carrying amount of the IPR&D assets will be their new accounting basis. Subsequent reversal of apreviously recognized impairment loss is prohibited. The initial determination and subsequent evaluation for impairment of the IPR&D assetrequires management to make significant judgments and estimates. Once an IPR&D project has been completed, the useful life of the IPR&Dasset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value is written off.
Income Taxes—Deferred taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets andliabilities and their respective tax bases, operating losses and tax credit carryforwards. Valuation allowances are provided if it is more likelythan not that some or all of the deferred tax assets will not be realized.
Revenue Recognition—We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) authoritativeguidance for Revenue Recognition. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collectability isreasonably assured.
We derive revenue principally from the sale of our products to distributors and to OEMs or their contract manufacturers. Our deliveryterms are primarily FOB shipping point, at which time title and all risks of ownership are transferred to the customer.
Non-distributors—For non-distributors, revenue is recognized when title to the product is transferred to the customer, which occursupon shipment or delivery, depending upon the terms of the customer order, provided that persuasive evidence of a sales arrangement exists,the price is fixed or determinable, collection of the resulting receivables is reasonably assured, there are no customer acceptance requirementsand there are no remaining significant obligations. Provisions for returns and allowances for non-distributor customers are provided at the timeproduct sales are recognized. An allowance for sales returns and allowances for non-distributor customers are recorded based on historicalexperience or specific identification of an event necessitating an allowance.
Distributors—Agreements with our two primary distributors permit the return of 3% to 5% of their purchases during the precedingquarter for purposes of stock rotation. For one of these distributors, a scrap allowance of 2% of the preceding quarter’s purchases is permitted.We also provide discounts to certain distributors based on volume of product they sell for a specific product with a specific volume range for agiven customer over a period not to exceed one year.
We recognize revenue from each of our distributors using either of the following bases. Once adopted, the basis for revenue recognitionfor a distributor is maintained unless there is a change in circumstances indicating the basis for revenue recognition for that distributor is nolonger appropriate.
• Sell-in Basis—Revenue is recognized upon shipment if we conclude we meet the same criteria as for non-distributors and we can
reasonably estimate the credits for returns, pricing allowances and/or other concessions. We record an estimated allowance, at the timeof shipment, based upon historical patterns of returns, pricing allowances and other concessions (i.e., “sell-in” basis).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
• Sell-through Basis—Revenue and the related costs of sales are deferred until the resale to the end customer if we grant more thanlimited rights of return, pricing allowances and/or other concessions or if we cannot reasonably estimate the level of returns andcredits issuable (i.e., “sell-through” basis). Under the sell-through basis, accounts receivable are recognized and inventory is relievedupon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceableright to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred income andallowance on sales to distributors in the consolidated balance sheet. When the related product is sold by our distributors to their endcustomers, at which time the ultimate price we receive is known, we recognize previously deferred income as sales and cost of sales.
Sell-through revenue recognition is highly dependent on receiving pertinent and accurate data from our distributors in a timely fashion.Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as thequantities of our products they still have in stock. We must use estimates and apply judgments to reconcile distributors’ reportedinventories to their activities. Any error in our judgment could lead to inaccurate reporting of our net sales, gross profit, deferredincome and allowances on sales to distributors and net income.
Software became an element of our revenue upon the acquisition of Hifn in April 2009. To date, software revenue has been animmaterial portion of our net sales.
Research and Development Expenses—Research and development costs consist primarily of salaries, employee benefits, mask toolingcosts, depreciation, amortization, overhead, outside contractors, facility expenses, and non-recurring engineering fees. Expenditures forresearch and development are charged to expense as incurred. In accordance with FASB authoritative guidance for the costs of computersoftware to be sold, leased or otherwise marketed, certain software development costs are capitalized after technological feasibility has beenestablished. The period from achievement of technological feasibility, which we define as the establishment of a working model, until thegeneral availability of such software to customers, has been short, and therefore software development costs qualifying for capitalization havebeen insignificant. Accordingly, we have not capitalized any software development costs in fiscal years 2011, 2010 and 2009.
In connection with the Hifn acquisition in April 2009, we assumed a contractual agreement under which certain research anddevelopment costs are eligible for reimbursement. Amounts collected under this arrangement are offset against research and developmentexpense. During fiscal year 2011 and fiscal year 2010, we received $5.0 million and $4.6 million, respectively, for work performed, whichwas recorded as an offset to research and development expenses.
Advertising Expenses—We expense advertising costs as incurred. Advertising expenses for fiscal years 2011, 2010 and 2009 were notmaterial.
Comprehensive Income (Loss)—Comprehensive income (loss) includes charges or credits to equity related to changes in unrealizedgains or losses on marketable securities, net of taxes. Comprehensive income (loss) for fiscal years 2011, 2010 and 2009 has been disclosedwithin the consolidated statements of stockholders’ equity and comprehensive income (loss).
Foreign Currency—The accounts of foreign subsidiaries are remeasured to U.S. dollars for financial reporting purposes by using theU.S. dollar as the functional currency and exchange gains and losses are reported in income and expenses. These currency gains or losses arereported in interest income and other, net in the consolidated statements of operations. Monetary balance sheet accounts are remeasured usingthe current
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exchange rate in effect at the balance sheet date. For non-monetary items, the accounts are measured at the historical exchange rate. Revenuesand expenses are remeasured at the average exchange rates for the period. Foreign currency transaction losses were not material for fiscalyears 2011, 2010 and 2009.
Concentration of Credit Risk and Significant Customers—Financial instruments potentially subjecting us to concentrations of creditrisk consist primarily of cash, cash equivalents, short-term marketable securities, accounts receivable and long-term investments. The majorityof our sales are derived from distributors and manufacturers in the communications, industrial, storage and computer industries. We performongoing credit evaluations of our customers and generally do not require collateral for sales on credit. We maintain allowances for potentialcredit losses, and such losses have been within management’s expectations. Charges to bad debt expense were insignificant for fiscal years2011, 2010 and 2009. Our policy is to invest our cash, cash equivalents and short-term marketable securities with high credit quality financialinstitutions and limit the amounts invested with any one financial institution or in any type of financial instrument. We do not hold or issuefinancial instruments for trading purposes.
We sell our products to distributors and OEMs throughout the world. Future Electronics, Inc. (“Future”), a related party, was andcontinues to be our largest distributor. Future, on a worldwide basis, represented 30%, 28% and 35% of net sales in fiscal years 2011, 2010and 2009, respectively. No other OEM customer or distributor accounted for 10% or more of our net sales in fiscal year 2011, 2010 or 2009.
Concentration of Other Risks—The majority of our products are currently fabricated at Globalfoundries Singapore Pte. Ltd. (f.k.a.Chartered Semiconductor Manufacturing Ltd.), Episil Technologies Inc. (“Episil”) in Taiwan, and Hangzhou Silan Microelectronics Co. Ltd.and Hangzhou Silan Integrated Circuit Co. Ltd. (collectively “Silan”) in the People’s Republic of China (“PRC”), and are assembled and testedby other third-party subcontractors located in Asia. A significant disruption in the operations of one or more of these subcontractors wouldimpact the production of our products for a substantial period of time which could have a material adverse effect on our business, financialcondition and results of operations.
Fair Value of Financial Instruments—We estimate the fair value of our financial instruments by using available market informationand valuation methodologies considered to be appropriate. However, considerable judgment is required in interpreting market data to developthe estimates of fair value. The use of different market assumptions and/or estimation methodologies could have a material effect on estimatedfair value amounts. The estimated fair value of our carrying values of cash and cash equivalents, short-term marketable securities, accountsreceivable, accounts payable and accrued liabilities at March 27, 2011, March 28, 2010 and March 29, 2009 was not materially different fromthe carrying values presented in the consolidated balance sheets due to the relatively short periods to maturity of the instruments.
Stock-Based Compensation—The estimated fair value of the equity-based awards, less expected forfeitures, is amortized over theawards’ vesting period on a straight-line basis. Determining the fair value of stock-based awards at the grant date requires considerablejudgment, including estimating expected volatility, forfeiture rate, expected term and risk-free interest rate. If factors change and we employdifferent assumptions, stock-based compensation expense may differ significantly from what we have recorded in the prior years. In addition,we follow the “with-and-without” intra-period allocation approach in our tax attribute calculations.
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Recent Accounting Pronouncements
In December 2010, the FASB issued an update to its existing guidance on goodwill and other intangible assets. This guidance modifiesStep 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity isrequired to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that agoodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to betested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value ofa reporting unit below its carrying amount. This guidance is effective for fiscal years, and interim periods within those years, beginning afterDecember 15, 2010, which is beginning March 28, 2011 for us. We are currently evaluating the impact of implementing this guidance on ourbusiness, financial condition and results of operations.
In January 2010, the FASB Emerging Issues Task Force issued new authoritative guidance addressing certain measurements anddisclosures about purchases, sales, issuances, and settlements in Level 3 fair value measurements. We are currently evaluating the impact ofimplementing the disclosures about purchases, sales, issuances, and settlements in Level 3 fair value measurements on our financial positionand result of operations, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscalyears. Historically, we have not held investments with Level 3 fair value measurements.
NOTE 3. BUSINESS COMBINATIONS
We periodically evaluate potential strategic acquisitions to build upon our existing library of intellectual property, human capital andengineering talent, in order to expand our capabilities in the areas in which we operate or to acquire complementary businesses.
We account for each business combination by applying the acquisition method, which requires (i) identifying the acquiree;(ii) determining the acquisition date; (iii) recognizing and measuring the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest of Exar in the acquiree at their acquisition date fair value; and (iv) recognizing and measuring goodwill or a gain from abargain purchase.
Assets acquired and liabilities assumed in a business combination that arise from contingencies are recognized at fair value on theacquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, we typically account for theacquired contingencies using existing guidance for a reasonable estimate.
To establish fair value, we measure the price that would be received to sell an asset or paid to transfer a liability in an ordinary transactionbetween market participants. The measurement assumes the highest and best use of the asset by the market participants that would maximizethe value of the asset or the group of assets within which the asset would be used at the measurement date, even if the intended use of the assetis different.
Goodwill is measured and recorded as the amount by which the consideration transferred, generally at the acquisition date fair value,exceeds the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controlling interest of Exar in theacquiree. To the contrary, if the acquisition date fair value of identifiable assets acquired, the liabilities assumed, and any non-controllinginterest of Exar in the acquiree exceeds the consideration transferred, it is considered a bargain purchase and we would recognize the resultinggain in earnings on the acquisition date.
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IPR&D assets are considered an indefinite-lived intangible asset and are not subject to amortization until its useful life is determined tobe no longer indefinite. IPR&D assets must be tested for impairment annually or more frequently if events or changes in circumstancesindicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the IPR&D asset with its carryingamount. If the carrying amount of the IPR&D asset exceeds its fair value, an impairment loss must be recognized in an amount equal to thatexcess. After an impairment loss is recognized, the adjusted carrying amount of the IPR&D assets will be its new accounting basis.Subsequent reversal of a previously recognized impairment loss is prohibited. The initial determination and subsequent evaluation forimpairment of the IPR&D asset requires management to make significant judgments and estimates. Once the IPR&D projects have beencompleted, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remainingcarrying value is written off.
Acquisition-related costs, including finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees areaccounted for as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issuedebt or equity securities are recognized in accordance with other applicable GAAP.
Acquisition of Neterion
On March 16, 2010, we completed the acquisition of Neterion, Inc. (“Neterion”), a supplier of 10 GbE controller silicon and cardsolutions optimized for virtualized data centers based in Sunnyvale, California. Neterion’s results of operations and estimated fair value ofassets acquired and liabilities assumed were included in our consolidated financial statements beginning March 17, 2010.
Consideration
We paid approximately $2.3 million in cash for Neterion, representing the fair value of total consideration transferred.
Acquisition-Related Costs
Acquisition-related costs relating to Neterion, which are included in the selling, general and administrative line on the consolidatedstatement of operations, were not material in fiscal year 2011. In fiscal year 2010, we recorded $0.5 million in acquisition-related costs relatingto Neterion.
Restructuring Costs
For disclosure regarding restructuring costs, see “Note 7—Restructuring & Other” contained herein.
Purchase Price Allocation
The allocation of the purchase price to Neterion’s tangible and identifiable intangible assets acquired and liabilities assumed was basedon their estimated fair values at the date of acquisition.
The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated togoodwill. The $464,000 in goodwill resulted primarily from our expected synergies from the integration of Neterion’s technology into ourproduct offerings. Goodwill is not deductible for tax purposes.
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The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in theNeterion acquisition was as follows (in thousands):
As ofMarch 16,
2010
Identifiable tangible assets
Cash and cash equivalents $ 747 Accounts receivable 313 Inventories 617 Other current assets 311 Other assets 651 Accounts payable and accruals (592) Other liabilities (2,920) Debt (6,963)
Total identifiable tangible assets, net (7,836) Identifiable intangible assets 9,700
Total identifiable assets, net 1,864 Goodwill 464 Fair value of total consideration transferred $ 2,328
Subsequent to the Neterion acquisition, there were no adjustments to the fair value allocated to each of the major classes of tangible andidentifiable intangible assets acquired and liabilities assumed on March 16, 2010.
Identifiable Intangible Assets
The following table sets forth the components of the identifiable intangible assets acquired in the Neterion acquisition, which are beingamortized over their estimated useful lives, with a maximum amortization period of six years, on a straight-line basis with no residual value:
Fair Value Useful Life (in thousands) (in years)
Existing technology $ 5,600 4.0 Patents/Core technology 900 6.0 In-process research and development 800 — Customer relationships 2,100 6.0 Tradenames/Trademarks 100 2.0 Non-Compete Agreements 100 1.3 Order backlog 100 0.2
Total acquired identifiable intangible assets $ 9,700
We allocated the purchase price using the established valuation techniques described below.
Inventories—The value allocated to inventories reflects the estimated fair value of the acquired inventory based on the expected salesprice of the inventory, less reasonable selling margin. The estimated fair value of raw materials is generally equal to their book value, due tothe fact that raw materials have not been used to develop any finished goods or work-in-progress and therefore, there is no value added to theraw materials.
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Intangible assets—The fair values of existing technology, patents/core technology, in-process research and development, customerrelationships, tradenames/trademarks, non-compete agreements and order backlog were determined using the income approach, whichdiscounted expected future cash flows to present value, taking into account multiple factors including, but not limited to, the stage ofcompletion, estimated costs to complete, utilization of patents/core technology, the risks related to successful completion, and the marketsserved. The cash flows were discounted at rates ranging from 4% to 33%. The discount rate used to value the existing intangible assets was20%.
Acquired In-Process Research and Development—The IPR&D project underway at Neterion at the acquisition date related to the X3500product series and as of such acquisition date had incurred approximately $2.9 million in expense. This project was abandoned in March 2011when we exited the 10 GbE market, resulting in a charge of $0.8 million in fiscal year 2011. (See “Note 9—Goodwill and Intangible Assets”).
Acquisition of Galazar
On June 17, 2009, we completed the acquisition of Galazar Networks, Inc. (“Galazar”), a fabless semiconductor company focused oncarrier grade transport over telecom networks based in Ottawa, Ontario, Canada. Galazar’s product portfolio addressed transport of a widerange of datacom and telecom services including Ethernet, SAN, TDM and video over SONET/SDH, PDH and OTN networks. Galazar’sresults of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statementsbeginning June 18, 2009.
Consideration
We paid approximately $5.0 million in cash for Galazar, representing the fair value of total consideration transferred. This amountincluded approximately $1.0 million contingent consideration that, for the purposes of valuation, was assigned a 95% probability or a fairvalue of $0.95 million. This payment was contingent on Galazar achieving a project milestone within a twelve-month period following theclose of the transaction. This milestone was met during the three months ended December 27, 2009 and $1.0 million was paid in cash. Theadditional $50,000 was expensed and included in the research and development line on the consolidated statement of operations for fiscal year2010.
Acquisition-Related Costs
Acquisition-related costs, or deal costs, relating to Galazar are included in the selling, general and administrative line on the consolidatedstatement of operations. No acquisition-related costs relating to Galazar were incurred during fiscal year 2011. In fiscal year 2010, werecorded $0.9 million in acquisition-related costs relating to Galazar.
Purchase Price Allocation
The allocation of the purchase price to Galazar’s tangible and identifiable intangible assets acquired and liabilities assumed was based ontheir estimated fair values at the date of acquisition.
The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated togoodwill. The $372,000 in goodwill resulted primarily from our expected synergies from the integration of Galazar’s technology into ourproduct offerings. Goodwill is not deductible for tax purposes.
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The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed in theGalazar acquisition was as follows (in thousands):
As ofJune 17,
2009
Identifiable tangible assets
Cash and cash equivalents $ 506 Other current assets 909 Other assets 250 Accounts payable and accruals (93) Accrued compensation and related benefits (230) Other obligations (224)
Total identifiable tangible assets, net 1,118 Identifiable intangible assets 3,460
Total identifiable assets, net 4,578 Goodwill 372 Fair value of total consideration transferred $4,950
Subsequent to the Galazar acquisition, there were no adjustments to the fair value allocated to each of the major classes of tangible andidentifiable intangible assets acquired and liabilities assumed on June 17, 2009.
Identifiable Intangible Assets
The following table sets forth the components of the identifiable intangible assets acquired in the Galazar acquisition, which are beingamortized over their estimated useful lives, with a maximum amortization period of six years, on a straight-line basis with no residual value:
Fair Value Useful Life (in thousands) (in years)
Existing technology $ 2,100 6.0 Patents/Core technology 400 6.0 In-process research and development 300 — Customer relationships 500 6.0 Tradenames/Trademarks 100 3.0 Order backlog 60 0.3
Total acquired identifiable intangible assets $ 3,460
We allocated the purchase price using the established valuation techniques described below.
Intangible assets—The fair value of existing technology, patents/core technology, in-process research and development, customerrelationships, tradenames/trademarks and order backlog were determined using the income approach, which discounted expected future cashflows to present value, taking into account multiple factors including, but not limited to, the stage of completion, estimated costs to complete,utilization of patents and core technology, the risks related to successful completion, and the markets served. The cash flows were discountedat rates ranging from 5% to 35%. The discount rate used to value the existing intangible assets was 28%.
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Acquired In-Process Research and Development—The IPR&D project underway at Galazar at the acquisition date relates to the MXP2product and as of such acquisition date had incurred approximately $2.3 million in expense. The total research and development expenseexpected to be incurred to complete the project is estimated at $12.0 million, based on the project development timeline and resourcerequirements, and is expected to be completed by February 2012. The percentage of completion for the project was estimated at 51% at theacquisition date.
Acquisition of Hifn
On April 3, 2009, we completed the acquisition of hi/fn, inc. (“Hifn”), a provider of network-and storage-security and data reductionproducts located in Los Gatos, California. Hifn’s results of operations and estimated fair value of assets acquired and liabilities assumed wereincluded in our consolidated financial statements beginning April 4, 2009.
Consideration
The following table summarizes the consideration paid for Hifn, representing the fair value of total consideration transferred (inthousands):
Amounts
Cash $56,825 Equity instruments 2,784
Total consideration paid $59,609
The $2.8 million estimated fair value for equity instruments represented approximately 429,600 shares of Exar’s common stock, valuedat $6.48 per share, the closing price reported on The NASDAQ Global Market on April 3, 2009 (the acquisition date).
Acquisition-Related Costs
Acquisition-related costs, or deal costs, relating to Hifn are included in the selling, general and administrative line on the consolidatedstatement of operations. Acquisition-related costs incurred in fiscal year 2011 relating to Hifn were not material. In fiscal year 2010, weincurred $3.8 million of acquisition-related costs relating to Hifn.
Purchase Price Allocation
The allocation of the purchase price to Hifn’s tangible and identifiable intangible assets acquired and liabilities assumed was based ontheir estimated fair values at the date of acquisition. Subsequent to the acquisition, we recorded $1.0 million in restructuring expenses relatingto Hifn for fiscal year 2010, relating to severance and a building lease obligation in Los Gatos, California. Severance costs relating to Hifnincurred during fiscal year 2011 were immaterial.
The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated togoodwill. The $2.2 million in goodwill resulted primarily from our expected future product sales synergies from combining Hifn’s productswith our product offerings. Goodwill is not deductible for tax purposes.
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The fair value allocated to each of the major classes of tangible and identifiable intangible assets acquired and liabilities assumed onApril 3, 2009 in the Hifn acquisition was as follows (in thousands):
As ofApril 3,
2009
Identifiable tangible assets
Cash and cash equivalents $16,468 Short-term marketable securities 14,133 Accounts receivable 2,982 Inventories 4,269 Other current assets 1,683 Property, plant and equipment 2,013 Other assets 1,721 Accounts payable and accruals (586) Accrued compensation and related benefits (1,860) Other current liabilities (2,963)
Total identifiable tangible assets, net 37,860 Identifiable intangible assets 19,500
Total identifiable assets, net 57,360 Goodwill 2,249 Fair value of total consideration transferred $59,609
Subsequent to the Hifn acquisition, there were no adjustments to the fair value allocated to each of the major classes of tangible andidentifiable intangible assets acquired and liabilities assumed on April 3, 2009.
Identifiable Intangible Assets
The following table sets forth the components of the identifiable intangible assets acquired in the Hifn acquisition, which are beingamortized over their estimated useful lives, with a maximum amortization period of seven years, on a straight-line basis with no residual value:
Fair Value Useful Life (in thousands) (in years)
Existing technology $ 9,000 5.0 Patents/Core technology 1,500 5.0 In-process research and development 1,600 — Customer relationships 1,300 7.0 Tradenames/Trademarks 700 3.0 Order backlog 900 0.5 Research and development reimbursement contract 4,500 1.5
Total acquired identifiable intangible assets $ 19,500
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We allocated the purchase price using the established valuation techniques as described below.
Inventories—Inventories acquired in connection with the Hifn acquisition were finished goods. The value allocated to inventories reflectsthe estimated fair value of the acquired inventory based on the expected sales price of the inventory, less reasonable selling margin.
Property, plant and equipment—The basis used for our analysis is the fair value in continued use, which is expressed in terms of theprice a willing and informed buyer would pay contemplating continued use as part of the assets in place for the purpose for which they weredesigned, engineered, installed, fabricated and erected.
Intangible assets—The fair value of existing technology, patents/core technology, in-process research and development, customerrelationships, tradenames/trademarks, order backlog and research and development reimbursement contract were determined using the incomeapproach, which discounted expected future cash flows to present value, taking into account multiple factors including, but not limited to, thestage of completion, estimated costs to complete, utilization of patents and core technology, the risks related to successful completion, and themarkets served. The cash flows were discounted at rates ranging from 5% to 30%. The discount rate used to value the existing intangibleassets was 14%.
Acquired In-Process Research and Development—The IPR&D projects underway at Hifn at the acquisition date were in the securityprocessors and flow through product families, each consisting of one project, and as of such acquisition date Hifn had incurred approximately$2.6 million and $1.1 million in costs related to those projects, respectively. The percentage of completion for these projects, at the date ofacquisition, was 90% and 30%, respectively. The total research and development expenditures expected to be incurred to complete the securityprocessors and flow through projects were approximately $2.1 million and $0.7 million, respectively, based on project development timelinesand resource requirements. The IPR&D projects for flow through and security processors were completed in January 2010 and July 2010,respectively, and are in production. The fair value, at date of acquisition, for both IPR&D projects, is being amortized over an estimated usefullife of five years.
NOTE 4. BALANCE SHEET DETAILS
Our property, plant and equipment consisted of the following (in thousands) as of the dates indicated:
March 27,2011
March 28,2010
Land $ 11,960 $ 11,960 Building 24,398 24,022 Machinery and equipment 46,863 46,040 Software and licenses 37,785 35,543
Property, plant and equipment, total 121,006 117,565 Accumulated depreciation and amortization (82,997) (74,624)
Total property, plant and equipment, net $ 38,009 $ 42,941
Depreciation and amortization expense for fiscal years 2011, 2010 and 2009 was $9.1 million, $9.5 million and $8.4 million,respectively.
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Our inventories consisted of the following (in thousands) as of the dates indicated:
March 27,2011
March 28,2010
Work-in-progress and raw materials $12,068 $ 9,318 Finished goods 9,894 5,682
Total inventories $21,962 $15,000
Our other accrued expenses consisted of the following (in thousands) as of the dates indicated:
March 27,2011
March 28,2010
Accrued legal and professional services $ 1,630 $ 4,063 Accrued sales and marketing expenses 1,036 878 Accrued manufacturing expenses, royalties and licenses 1,873 1,584 Accrued restructuring expenses 288 239 Other 554 294
Total other accrued expenses $ 5,381 $ 7,058
NOTE 5. CASH, CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuationtechniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. GAAPdescribes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, thatmay be used to measure fair value as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets orliabilities.
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Our investment assets, measured at fair value on a recurring basis, as of March 27, 2011 were as follows (in thousands, except forpercentages):
Total investment assets $35,455 $170,759 $206,214 100%
Our cash, cash equivalents and short-term marketable securities as of March 27, 2011 and March 28, 2010 were as follows (inthousands):
March 27,2011
March 28,2010
Cash and cash equivalents
Cash in financial institutions $ 7,636 $ 5,870
Cash equivalents
Money market funds 7,403 19,616 Total cash and cash equivalents $ 15,039 $ 25,486 Short-term marketable securities
U.S. government and agency securities $ 44,043 $ 59,747 Corporate bonds and commercial paper 78,588 62,122 Asset-backed securities 24,242 17,801 Mortgage-backed securities 39,087 46,928
Total short-term marketable securities $185,960 $186,598
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Our marketable securities include municipal securities, commercial paper, asset-backed and mortgage-backed securities, corporate bondsand U.S. government securities. We classify investments as available-for-sale at the time of purchase and re-evaluate such designation as ofeach balance sheet date. We amortize premiums and accrete discounts to interest income over the life of the investment. Our available-for-salesecurities, which we intend to sell as necessary to meet our liquidity requirements, are classified as cash equivalents if the maturity date is 90days or less from the date of purchase and as short-term marketable securities if the maturity date is greater than 90 days from the date ofpurchase.
All marketable securities are reported at fair value based on the estimated or quoted market prices as of each balance sheet date, withunrealized gains or losses, net of tax effect, recorded in accumulated other comprehensive income (loss) within stockholders’ equity exceptthose unrealized losses that are deemed to be other than temporary which are reflected in the impairment charges on investments line on theconsolidated statements of operations.
Realized gains or losses on the sale of marketable securities are determined by the specific identification method and are reflected in theinterest income and other, net line on the consolidated statements of operations.
Our net realized gains (losses) on marketable securities were as follows for the periods indicated (in thousands):
The following table summarizes our investments in cash equivalents and marketable securities as of March 27, 2011 and March 28,2010 (in thousands):
March 27, 2011
AmortizedCost
Unrealized
Fair Value
GrossGains(1)
GrossLosses(1)
Net Gain(Loss)(1)
Money market funds $ 7,403 $ — $ — $ — $ 7,403 U.S. government and agency securities 44,117 145 (219) (74) 44,043 Corporate bonds and commercial paper 77,957 694 (63) 631 78,588 Asset and mortgage-backed securities 63,370 172 (213) (41) 63,329
Total investments $192,847 $ 1,011 $ (495) $ 516 $193,363
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FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
March 28, 2010
AmortizedCost
Unrealized
Fair Value
GrossGains(1)
GrossLosses(1)
Net Gain(Loss)(1)
Money market funds $ 19,616 $ — $ — $ — $ 19,616 U.S. government and agency securities 58,943 835 (31) 804 59,747 Corporate bonds and commercial paper 61,240 900 (18) 882 62,122 Asset and mortgage-backed securities 64,329 496 (96) 400 64,729
Total investments $204,128 $ 2,231 $ (145) $ 2,086 $206,214 (1) Gross of tax impact
The asset-backed securities are comprised primarily of premium tranches of auto loans and credit card receivables, while our mortgage-backed securities are primarily from Federal agencies. We do not own auction rate securities nor do we own securities that are classified assubprime. As of the date of this Annual Report, we have sufficient liquidity and do not intend to sell these securities to fund normal operationsnor realize any significant losses in the short term; however, these securities are available for use, if needed, for current operations.
Management determines the appropriate classification of cash equivalents or short-term marketable securities at the time of purchase andreevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and accretion ofdiscounts to maturity and such accretion/amortization is included in the interest income and other, net line in the consolidated statement ofoperations. Cash equivalents and short-term marketable securities are reported at fair value with the related unrealized gains and lossesincluded in the accumulated other comprehensive income (loss) line in the consolidated balance sheets. As of March 27, 2011, there wasapproximately $0.3 million of net unrealized losses including tax expense from our level 1 and level 2 investments.
We periodically review our investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, butis not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length oftime and significance of a security’s loss position, our intent to not sell the security, and whether it is more likely than not that we will not haveto sell the security before recovery of its cost basis. Other-than-temporary declines in value of our investments are reported in the impairmentcharges on investments line in the consolidated statements of operations.
In fiscal year 2010, an investment in GSAA Home Equity with a cost of $425,000 was downgraded from a AAA rating to a CCCrating. As a result of the reduction in the rating, quantitative analysis showing an increase in the default rate and decrease in prepayment rate ofthe investment, we recorded an other-than-temporary impairment charge of $91,000 during the second quarter of fiscal year 2010. In the threemonths ended September 26, 2010, due to further decline in the investment, we recorded an additional other-than-temporary impairmentcharge of $62,000. In the three months ended December 26, 2010, we sold this investment resulting in an immaterial loss from its adjustedbasis.
In September 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code with theU.S. Bankruptcy Court for the Southern District of New York. As a result of Lehman’s bankruptcy filing, we recorded an other-than-temporary impairment charge of $0.6 million during fiscal year 2009. In the three months ended March 27, 2011, we sold this investmentresulting in an immaterial gain from its adjusted basis.
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The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at March 27,2011 and March 28, 2010 by expected maturity were as follows (in thousands):
March 27, 2011 March 28, 2010
AmortizedCost Fair Value
AmortizedCost Fair Value
Less than 1 year $ 78,378 $ 78,684 $108,812 $109,562 Due in 1 to 5 years 114,469 114,679 95,316 96,652
Total $192,847 $193,363 $204,128 $206,214
The following table summarizes the gross unrealized losses and fair values of our investments in an unrealized loss position as ofMarch 27, 2011 and March 28, 2010, aggregated by investment category and length of time that individual securities have been in acontinuous unrealized loss position (in thousands): March 27, 2011 Less than 12 months 12 months or greater Total
FairValue
GrossUnrealized
Losses
FairValue
GrossUnrealized
Losses
FairValue
GrossUnrealized
Losses
U.S. government and agency securities $25,936 $ (219) $ 325 $ (4) $26,261 $ (223) Corporate bonds and commercial paper 16,516 (63) 1,948 (9) 18,464 (72) Asset and mortgage-backed securities 34,143 (200) — — 34,143 (200)
Total $76,595 $ (482) $2,273 $ (13) $78,868 $ (495) March 28, 2010 Less than 12 months 12 months or greater Total
FairValue
GrossUnrealized
Losses
FairValue
GrossUnrealized
Losses
FairValue
GrossUnrealized
Losses
U.S. government and agency securities $ 5,399 $ (31) $— $ — $ 5,399 $ (31) Corporate bonds and commercial paper 8,851 (18) — — 8,851 (18) Asset and mortgage-backed securities 23,802 (69) 353 (27) 24,155 (96)
Total $38,052 $ (118) $353 $ (27) $38,405 $ (145)
NOTE 6. RELATED PARTY TRANSACTION
Affiliates of Future, Alonim Investments Inc. and two of its affiliates (collectively “Alonim”), own approximately 7.6 million shares, orapproximately 17%, of our outstanding common stock as of March 27, 2011. As such, Alonim is our largest stockholder.
Our sales to Future are made under a distribution agreement that provides protection against price reduction for its inventory of ourproducts and other sales allowances. We recognize revenue on sales to Future when Future sells the products to its end customers. Future hashistorically accounted for a significant portion of our net sales.
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Future’s contribution to our total net sales were as follows for the periods indicated:
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Future 30% 28% 35%
Future’s expenses for marketing promotional materials reimbursed were as follows for the periods indicated (in thousands):
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Future $ 28 $ 8 $ 52
NOTE 7. RESTRUCTURING & OTHER
During the fourth quarter of fiscal year 2011, we decided to exit the data center virtualization market, and, in connection therewith, tostop development of our 10GbE network interface cards. We determined that the current economic and market environment did not provide thepotential to deliver acceptable returns on the required investments in these products. As a result, in the fourth quarter of fiscal year 2011 weabandoned all related in-process research and development. In addition, we began to actively market for sale the related assets of our 10GbEtechnology, consisting primarily of underlying existing and core technology intangible assets. Charges related to this decision in the fourthquarter of fiscal year 2011 totaled approximately $11.1 million and included $7.5 million for the impairment of intangible assets, which isincluded within the impairment of intangible assets and goodwill line in our consolidated statements of operations, $2.1 million for the write-off of inventory, which is included within the cost of sales line in our consolidated statements of operations, and $1.2 million in severancerelated costs, which is included primarily within the research and development line in our consolidated statements of operations. The majorityof the severance related costs were paid out in fiscal year 2011.
The intangible asset impairment charge of $7.5 million consists of $0.8 million to the write-off abandoned IPR&D acquired in theNeterion acquisition and $6.7 million to write-down the carrying value of intangible assets that are held for sale to $0.2 million at March 27,2011, which represents their estimated fair value less costs to sell based on third-party bids received to date.
During the quarter ended December 26, 2010, we vacated our facility in Framingham, Massachusetts and recorded a restructuringreserve of $134,000 for the remaining payments owed on this site. We expect this balance to be paid by November 2011 when the leaseexpires.
In connection with the Neterion acquisition in March 2010, we assumed a lease obligation for a facility in Sunnyvale, California. Wevacated the facility in May 2010 and recorded a restructuring reserve of approximately $234,000, during the quarter ended June 27, 2010, forthe remaining payments due on this site. This balance is expected to be paid by August 2011 when the lease expires.
In connection with the acquisition of Sipex Corporation (“Sipex”) in August 2007, our management approved and initiated plans torestructure the operations of the combined company to eliminate certain duplicative activities, reduce costs and better align product andoperating expenses with then current economic
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conditions. These costs were accounted for as liabilities assumed as part of the business combination. The costs remaining as of March 27,2011 and March 28, 2010 relate to office space in Belgium that has been vacated but is under lease until March 2012 and were $81,000 and$209,000, respectively.
Our restructuring liabilities were included in the other accrued expenses line in our consolidated balance sheets, and the activitiesaffecting the liabilities for fiscal year 2011 are summarized as follows (in thousands):
FacilityCosts
Balance at March 28, 2010 $ 239 Payments (318) Additional accruals 367
Balance at March 27, 2011 $ 288
NOTE 8. LONG-TERM INVESTMENT
Our long-term investment consists of our investment in Skypoint Telecom Fund II (US), L.P. (“Skypoint Fund”). Skypoint Fund is aventure capital fund that invests primarily in private companies in the telecommunications and/or networking industries. We account for thisnon-marketable equity investment under the cost method. We periodically review and determine whether the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.
Our investment in TechFarm Ventures L.P. (“TechFarm Fund”), to which we contributed our total commitment to the fund of $4.0million in capital since we became a limited partner in May 2001, had a carrying amount of zero as of March 27, 2011 and March 28, 2010,reflecting the net of the capital contribution and the cumulative impairment charges.
As of March 27, 2011 and March 28, 2010, our long-term investments balances, which are included in the other non-current assets lineon the consolidated balance sheet, were as follows (in thousands):
March 27,2011
March 28,2010
Skypoint Fund $ 1,563 $ 1,440
We have made $4.7 million in capital contributions to Skypoint Fund since we became a limited partner in July 2001. We contributed$186,000 and $41,000 to the fund during fiscal years of 2011 and 2010, respectively. As of March 27, 2011, we have a remaining potentialcapital commitment of approximately $0.3 million should the general partner decide to request it up to June 30, 2011.
The carrying amount of $1.6 million reflects the net of the capital contributions, cumulative impairment charges and capital distributions.We received capital distributions of $63,000 and $36,000, respectively, during fiscal year 2011 and fiscal year 2010.
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Impairment
We analyzed the fair value of the underlying investments of Skypoint Fund and TechFarm Fund and concluded portions of the carryingvalue were other-than-temporarily impaired and recorded impairments for fiscal years ended March 27, 2011, March 28, 2010 and March 29,2009 as follows (in thousands):
(1) TechFarm Fund has had a carrying amount of zero since March 29, 2009.
NOTE 9. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in abusiness combination. We evaluate goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest thatthe carrying amount may not be recoverable. We conduct our annual impairment analysis in the fourth quarter of each fiscal year. Impairmentof goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of thereporting unit. The fair value of the reporting unit is estimated using a combination of the income approach that uses discounted cash flowsand the market approach that utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwillis considered impaired and a second step is performed to measure the amount of impairment loss. Because we have one reporting unit, weutilize an entity-wide approach to assess goodwill for impairment.
In the fourth quarter of fiscal year 2011, we conducted our annual impairment review comparing the fair value of our one reporting unitwith its carrying value. As of the test date and as of year-end, and before consideration of a control premium, the fair value, which wasestimated as our market capitalization, exceeded the carrying value of our net assets. As a result, no impairment was recorded for fiscal year2011.
In the fourth quarter of fiscal year 2010, we conducted our annual impairment review comparing the fair value of our one reporting unitwith the carrying value. Based on the results at the time of our analysis, the fair value, which was estimated as our market capitalization,exceeded the carrying value of our net assets. As a result, no impairment was recorded for fiscal year 2010.
In the third quarter of fiscal year 2009, the rapid and severe deterioration of worldwide economic conditions affected our industry andled customers to scale down their levels of production. As a result of these impairment indicators, we considered the potential impairment ofgoodwill. Indicators that required us to perform an interim impairment review consisted of further weakening in new orders from ourcustomers throughout the third quarter and into the fourth quarter of fiscal year 2009, as well as the uncertainty of the magnitude and durationof the recession as evidenced by industry analysts expectations that demand for semiconductors would remain weak until economic conditionsimprove. In addition, we experienced a significant decline in our stock price that reduced our market capitalization below our net asset carryingvalue for an extended period of time. We performed an interim goodwill impairment analysis and recorded a $46.2 million impairment loss thatwas included in the impairment of intangible assets and goodwill line in the consolidated statements of operations.
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The changes in the carrying amount of goodwill for fiscal years 2011 and 2010 were as follows (in thousands):
Amount
Balance as of March 29, 2009 $ — Goodwill addition in connection with the Hifn acquisition 2,249 Goodwill addition in connection with the Galazar acquisition 372 Goodwill addition in connection with the Neterion acquisition 464
Balance as of March 28, 2010 $3,085 Goodwill additions, impairments and adjustments 99
Balance as of March 27, 2011 3,184
Intangible Assets
Our purchased intangible assets at March 27, 2011 and March 28, 2010 were as follows (in thousands): March 27, 2011 March 28, 2010
Total $ 48,990 $ (33,600) $15,390 $55,324 $ (23,367) $31,957 (1) The carrying amount as of March 27, 2011 is presented net of intangible asset impairment charges of approximately $7.5 million and
$13.5 million recorded during fiscal year 2011 and fiscal year 2009, respectively.
Long-lived assets are amortized on a straight-line basis over their respective estimated useful lives. We evaluate the remaining useful lifeof our long-lived assets that are being amortized each reporting period to determine whether events and circumstances warrant a revision to theremaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of thelong-lived asset is amortized prospectively over the remaining useful life. Long-lived assets are evaluated for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. We compare the carrying value of long-livedassets to our projection of future undiscounted cash flows attributable to such assets and, in the event that the carrying value exceeds the futureundiscounted cash flows, we record an impairment charge equal to the excess of the carrying value over the asset’s fair value.
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Although the assumptions used in projecting future revenues and gross margins are consistent with those used in our annual strategic planningprocess, intangible asset impairment charges might be required in future periods if our assumptions are not achieved.
IPR&D assets are considered indefinite-lived intangible assets and are not subject to amortization until their useful life is determined.IPR&D assets are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset might beimpaired.
During the fourth quarter of fiscal year 2011, we decided to exit the data center virtualization market, and, in connection therewith, tostop development of our 10GbE network interface cards. We determined that the current economic and market environment did not provide thepotential to deliver acceptable returns on the required investments in these products. As a result, in the fourth quarter of fiscal year 2011 weabandoned all related in-process research and development. In addition, we began to actively market for sale the related assets of our 10GbEtechnology, consisting primarily of underlying existing and core technology intangible assets. Charges related to this decision in the fourthquarter of fiscal year 2011 included $7.5 million for the impairment of intangible assets, which is included within the impairment of intangibleassets and goodwill line in our consolidated statements of operations.
The intangible asset impairment charge of $7.5 million consists of $0.8 million to the write-off abandoned IPR&D acquired in theNeterion acquisition and $6.7 million to write-down the carrying value of intangible assets that are held for sale to $0.2 million at March 27,2011, which represents their estimated fair value less costs to sell based on third-party bids received to date. In June 2011, we completed theasset sale process and received $0.2 million, net of selling costs.
As noted in the Goodwill discussion above, in the third quarter of fiscal year 2009, there were certain events that gave rise to impairmentindicators and as a result we analyzed our long-lived assets for impairment. The analysis determined that the carrying amount of the intangibleassets exceeded the implied fair value under the test for impairment and the difference was allocated to the intangible assets of the impactedasset group on a pro-rata basis using the relative carrying amounts of the assets. We recorded an impairment charge of approximately $13.5million, which is included in the impairment of intangible assets and goodwill line in the consolidated statements of operations of which $9.8million related to existing technology, $1.4 million to patents/core technology, $1.3 million to distributor relationships, $0.9 million tocustomer relationships and $0.1 million to tradenames/trademarks.
The aggregate amortization expenses for our purchased intangible assets for fiscal years ended March 27, 2011, March 28, 2010 andMarch 29, 2009 were as follows (in thousands, except weighted average lives):
Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number ofcommon shares outstanding for the periods. Diluted earnings per share (“EPS”) reflects the potential dilution that would occur if outstandingstock options or warrants to purchase common stock were exercised for common stock, using the treasury stock method, and the commonstock underlying outstanding restricted stock units (“RSUs”) was issued.
A summary of our loss per share for the three fiscal years of 2011, 2010 and 2009 was as follows (in thousands, except per shareamounts):
March 27,2011
March 28,2010
March 29,2009
Net loss $(35,668) $(28,110) $(73,036) Shares used in computation:
Weighted average shares of common stock outstanding used in computation of basic loss pershare 44,218 43,584 42,887
Dilutive effect of stock options and restricted stock units — — — Shares used in computation of diluted loss per share 44,218 43,584 42,887 Loss per share—basic and diluted $ (0.81) $ (0.64) $ (1.70)
Options to purchase shares of common stock and unvested restricted stock units for shares of common stock were excluded from ourloss per share calculation under the treasury stock method for the periods presented and were as follows (in thousands):
March 27,2011(1)
March 28,2010(1)
March 29,2009(1)
Options and RSUs 316 337 214 (1) As we incurred a net loss, we did not consider the impact of potentially dilutive instruments in the weighted average number of shares
calculation as their inclusion would have been anti-dilutive. Had we had income for these periods, our diluted shares would have increasedby the aforementioned amount.
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The following shares were not included in the computation of diluted shares outstanding because they were anti-dilutive under thetreasury stock method (in thousands, except per share amounts):
Our application of the treasury stock method in determining the dilutive effect of stock options and RSUs includes assumed cashproceeds from option exercises, the average unamortized stock-based compensation expense for the period, and the estimated deferred taxbenefit or detriment associated with stock-based compensation expense.
NOTE 11. COMMON STOCK REPURCHASES
From time to time, we acquire outstanding common stock in the open market to partially offset dilution from our equity award programs,to increase our return on our invested capital and to bring our cash to a more appropriate level for our company.
On August 28, 2007, we announced the approval of a share repurchase plan (“2007 SRP”) and authorized the repurchase of up to $100million of our common stock.
During fiscal years 2011 and 2010, we did not repurchase any shares of our common stock.
As of March 27, 2011, the remaining authorized amount for share repurchases under the 2007 SRP was $11.8 million. The 2007 SRPdoes not have a termination date. We may continue to utilize our share repurchase plan, which would reduce our cash, cash equivalents and/orshort-term marketable securities available to fund future operations and to meet other liquidity requirements.
NOTE 12. EMPLOYEE BENEFIT PLANS
Exar Savings Plan
The Exar Savings Plan, as amended and restated, covers our eligible U.S. employees. The Exar Savings Plan provides for voluntarysalary reduction contributions in accordance with Section 401(k) of the Internal Revenue Code as well as matching contributions from thecompany based on the achievement of specified operating results.
Our matching contributions to the plan for the three fiscal years of 2011, 2010 and 2009 were as follows (in thousands):
March 27,2011
March 28,2010
March 29,2009
Matching contributions $ 404 $ 442 $ 336
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Executive and Employee Incentive Compensation Programs
Our incentive compensation programs provide for incentive awards for substantially all employees based on the achievement of personalobjectives and our operating performance results. Our incentive compensation programs may be amended or discontinued at the discretion ofour board of directors.
Our paid and unpaid incentive compensation for the three fiscal years of 2011, 2010 and 2009 were as follows (in thousands):
Our ESPP permits employees to purchase common stock through payroll deductions at a purchase price that is equal to 95% of ourcommon stock price on the last trading day of each three-calendar-month offering period. Our ESPP is non-compensatory.
The following table summarizes our ESPP transactions during the fiscal periods presented (in thousands, except per share amounts):
Shares ofCommon Stock
WeightedAverage
Price
Authorized to issue: 4,500 —
Reserved for future issuance:
Fiscal year ending March 27, 2011 1,480 — Fiscal year ending March 28, 2010 1,549 —
Issued:
Fiscal year ending March 27, 2011 69 $ 6.41 Fiscal year ending March 28, 2010 59 6.64 Fiscal year ending March 29, 2009 56 7.08
Equity Incentive Plans
We currently have three equity incentive plans including the Exar Corporation 2006 Equity Incentive Plan (the “2006 Plan”) and twoother equity plans assumed upon our August 2007 acquisition of Sipex: the Sipex Corporation Amended and Restated 2002 Non-StatutoryStock Option Plan and the Sipex Corporation 2006 Equity Incentive Plan (collectively, the “Sipex Plans”). The Sipex Corporation 2000 Non-Qualified Stock Option Plan expired October 31, 2010.
The 2006 Plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, stock bonuses and other forms ofawards granted or denominated in common stock or units of common stock, as well as cash bonus awards. RSUs granted under the 2006 Planare counted against authorized shares available for future issuance on a basis of two shares for every RSU issued. The 2006 Plan allows forperformance-based
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vesting and partial vesting based upon level of performance. Grants under the Sipex Plans are only available to former Sipex employees oremployees of Exar hired after the Sipex acquisition. At our annual meeting on September 15, 2010, our stockholders approved an amendmentto the 2006 Plan to increase the aggregate share limit under the 2006 Plan by an additional 5.5 million shares to 8.3 million shares. AtMarch 27, 2011, there were 6.0 million shares available for future grant under all our equity incentive plans.
The following table summarizes information about our stock options outstanding at March 27, 2011: Options Outstanding Options Exercisable
The assumptions used in calculating the fair value of stock-based compensation represent our estimates, but these estimates involveinherent uncertainties and the application of management judgments which include the expected term of the share-based awards, stock pricevolatility and forfeiture rates. As a result, if factors change and we use different assumptions, our stock-based compensation expense could bematerially different in the future.
Valuation Method—we compute the fair value of stock options utilizing the Black-Scholes option pricing model.
Expected Term—we estimate the expected life of options granted based on historical exercise and post-vest cancellation patterns, whichwe believe are representative of future behavior.
Volatility—our expected volatility is based on historical data of the market closing price for our common stock as reported by TheNASDAQ Global Market under the symbol “EXAR” and the expected term of our stock options.
Risk-Free Interest Rate—the risk-free interest rate assumption is based on the observed interest rate of the U.S. Treasury appropriate forthe expected term of the option to be valued.
Dividend Yield—we do not currently pay dividends and have no plans to do so in the future. Therefore, we have assumed a dividendyield of zero.
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We have used the following weighted average assumptions to calculate the fair values of options granted during the years presented:
A summary of stock option transactions during the periods indicated for all stock option plans was as follows:
OutstandingOptions /Quantity
WeightedAverageExercise
Price
WeightedAverage
RemainingContractual
Term(in years)
AggregateIntrinsicValue(1)
(in thousands)
In-the-money
OptionsVested andExercisable
(inmillions)
Balance at March 30, 2008 5,086,297 $ 13.23 3.85 $ 2,383 0.7 Granted 2,152,475 7.92
Exercised (579,142) 5.38
Cancelled (2,526,228) 16.18
Forfeited (727,311) 11.07
Balance at March 29, 2009 3,406,091 $ 9.48 5.37 $ 129 0.2 Granted 2,687,450 6.81
Exercised (26,343) 5.63
Cancelled (262,629) 14.22
Forfeited (459,065) 8.49
Balance at March 28, 2010 5,345,504 $ 8.01 5.38 $ 1,882 0.2 Granted 2,113,190 6.60
Exercised (125,920) 6.07
Cancelled (308,595) 11.02
Forfeited (1,294,715) 6.93
Balance at March 27, 2011 5,729,464 $ 7.61 4.74 $ 147 0.1 Vested and expected to vest at March 27, 2011 5,482,432 $ 7.65 4.70 $ 138 Vested and exercisable at March 27, 2011 2,157,669 $ 8.72 3.79 $ 51 (1) The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value, which is based on the closing price of our
common stock of $6.08, $7.32 and $6.17 as of March 27, 2011, March 28, 2010 and March 29, 2009, respectively. These were theamounts which would have been received by option holders if all option holders exercised their options as of that date.
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Options exercised for the three fiscal years of 2011, 2010 and 2009 were as follows (in thousands):
March 27,2011
March 28,2010
March 29,2009
Intrinsic value of options exercised $ 100 $ 29 $ 1,302 Cash received related to option exercises 765 148 3,116 Tax benefit recorded 2,300 2,503 1,307
RSUs
We issue RSUs to employees and non-employee directors. RSUs generally vest on the first or third anniversary date from the grant date,although the RSUs issued in exchange for options tendered in our option exchange program in the third quarter of fiscal year 2009 vested intwo equal annual installments. Prior to vesting, RSUs do not have dividend equivalent rights, do not have voting rights and the sharesunderlying the RSUs are not considered issued and outstanding. Shares are issued on the date the RSUs vest.
A summary of RSU transactions during the periods indicated for all stock option plans is as follows:
Shares
WeightedAverageGrant-
DateFair
Value
WeightedAverage
RemainingContractual
Term in Years
AggregateIntrinsicValue(1)
(in thousands)
UnrecognizedStock-based
CompensationCost(2)
(in millions)
Unvested at March 30, 2008 304,933 $ 12.20 1.41 $ 2,497 $ 2.5 Granted 598,409 7.18
Issued and released (117,437) 6.90
Cancelled (55,668) 9.16
Unvested at March 29, 2009 730,237 $ 8.36 1.14 $ 4,506 $ 2.0 Granted 557,784 7.24
Issued and released (349,409) 6.90
Cancelled (104,408) 8.54
Unvested at March 28, 2010 834,204 $ 8.20 1.04 $ 6,106 $ 4.2 Granted 399,183 6.76
Issued and released (618,411) 6.90
Cancelled (57,878) 7.52
Unvested at March 27, 2011 557,098 $ 7.17 1.09 $ 3,387 $ 2.3 Vested and expected to vest at March 27, 2011 531,942 $ 7.17 1.06 $ 3,234 (1) The aggregate intrinsic value of RSUs represents the closing price per share of our common stock at the end of the periods presented,
multiplied by the number of unvested RSUs or the number of vested and expected to vest RSUs, as applicable, at the end of each period.(2) For RSUs, stock-based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of
RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, was recognized on a straight-line basis, over the vestingperiod.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
In July 2009, we granted performance-based RSUs covering 99,000 shares to certain executives, issuable upon meeting certainperformance targets in fiscal year 2010 and vesting annually over a three year period beginning July 1, 2010. The annual vesting requirescontinued service through each annual vesting date. During fiscal year 2011 and fiscal year 2010, $216,000 and $368,000, respectively, ofcompensation expense was recorded to reflect the achievement of these performance targets.
In April 2010, we granted performance-based RSUs covering 56,000 shares to our CEO, issuable upon meeting certain performancetargets in our fiscal year 2011 and vesting annually over a three year period beginning May 3, 2010. The annual vesting requires continuedservice through each annual vesting date. During fiscal year 2011, $239,000 of compensation expense was recorded for these awards.
Stock-Based Compensation Expenses
The following table summarizes stock-based compensation expense related to stock options and RSUs for fiscal years 2011, 2010 and2009 (in thousands):
March 27,2011
March 28,2010
March 29,2009
Cost of sales $ 489 $ 528 $ 595 Research and development 3,241 2,324 1,614 Selling, general and administrative 3,651 3,113 2,725
Total stock-based compensation expense $ 7,381 $ 5,965 $ 4,934
The amount of stock-based compensation cost capitalized in inventory was not material at each of the fiscal year ends presented.
Unrecognized Stock-based Compensation Expense
The following table summarizes unrecognized stock-based compensation expense related to stock options and RSUs for the periodsindicated below as follows: March 27, 2011 March 28, 2010 March 29, 2009
Total Stock-based compensation expense $ 9,626 $ 12,307 $ 8,002 (1) For RSUs, stock-based compensation expense was calculated based on our stock price on the date of grant, multiplied by the number of
RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, is recognized on a straight-line basis over the vesting period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
Option Exchange Program
On October 23, 2008, we commenced a tender offer (the “Offer”) and filed a Schedule TO with the SEC pursuant to which holders ofoptions with exercise prices equal to or greater than $11.00 per share and an expiration date after March 31, 2009 could tender their options inexchange for RSUs awards. The exchange ratio of shares subject to such eligible options to shares subject to new awards issued was 4-to-1,5-to-1 or 6-to-1, depending on the exercise price of the option being exchanged. New awards received in exchange for eligible options aresubject to a two-year vesting schedule with 50% vesting at each anniversary of the grant date.
Pursuant to the Offer, 242 eligible participants tendered, and we accepted for exchange, options to purchase an aggregate of 1,650,231shares of our common stock, representing approximately 94% of the 1,755,691 shares subject to options that were eligible to be exchanged inthe Offer as of the commencement of the Offer on October 23, 2008. On November 24, 2008, upon the terms and subject to the conditions setforth in the Offer to Exchange Certain Outstanding Options for Restricted Stock Units, filed as an exhibit to the Schedule TO, we issued RSUawards covering an aggregate of 344,020 shares of our common stock in exchange for the options surrendered pursuant to the Offer.
The new awards were granted with a price of $6.51 per share, the closing price of our common stock on November 24, 2008 as reportedon The NASDAQ Global Select Market. The fair value of the options exchanged was measured as the total of the unrecognized compensationcost of the original options tendered and the incremental compensation cost of the RSUs awarded on November 24, 2008, the date ofexchange. The incremental compensation cost of $1.2 million, was measured as the excess of the fair value of the RSUs over the fair value ofthe options immediately before cancellation based on the share price and other pertinent factors at that date. The amount was amortized over thetwo years service period. During fiscal years 2011, 2010 and 2009, we recorded approximately $327,000, $530,000 and $208,000,respectively, of such incremental stock-based compensation expense.
NOTE 14. WARRANTS
In connection with the Sipex acquisition, we assumed warrants with a fair value of $1.5 million on the date of acquisition, which enablethe holders, to purchase a total of approximately 280,000 shares of our common stock. The warrants were exercisable at any time for shares ofour common stock at an initial exercise price of $9.63 per share, subject to adjustment upon certain events. The warrants expired unexercisedon May 18, 2011.
NOTE 15. LEASE FINANCING OBLIGATION
In connection with the Sipex acquisition, we assumed a lease financing obligation related to the Hillview facility located in Milpitas,California (the “Hillview Facility”). The lease term expired March 31, 2011 and had average lease payments of approximately $1.4 million peryear.
The fair value of the Hillview Facility was estimated at $13.4 million at the time of the acquisition and was included in the property, plantand equipment, net line on the consolidated balance sheet. In accordance with purchase accounting, we have accounted for this sale andleaseback transaction as a financing transaction which was included in the long-term lease financing obligations line on our consolidatedbalance sheet. The effective interest rate is 8.2%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
Depreciation for the Hillview Facility recorded over the straight-line method for the remaining useful life for the periods indicated belowwas as follows (in thousands):
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Depreciation expense $ 323 $ 352 $ 352
The sublease income recorded in the interest income and other, net line in our consolidated statements of operations for the periodsindicated below was as follows (in thousands):
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Sublease income $ 1,427 $ 1,396 $ 1,396
We have also acquired engineering design tools (“design tools”) under capital leases. We acquired $5.2 million of design tools inDecember 2007 under a four-year license, $3.7 million of design tools in November 2008 under a three-year license, $1.1 million in July 2009under a 3-year license, $1.3 million in December 2009 under a 28-month license, and $1.0 million in June 2010 under a 3-year license whichwere accounted for as capital leases and recorded in the property, plant and equipment, net line on the consolidated balance sheets. The relateddesign tool obligations were included in the lease financing obligations line in our consolidated balance sheets.
Amortization of the design tools recorded using the straight-line method over the remaining useful life for the periods indicated belowwas as follows (in thousands):
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Amortization expense $ 3,526 $ 2,541 $ 1,574
Future minimum lease payments for the lease financing obligations as of March 27, 2011 were as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009 (1) At the end of the lease term, March 31, 2011, the estimated final lease obligation was approximately $12.2 million, which we settled in a
noncash transaction by returning the Hillview Facility to the lessor. As a result, during the first quarter of fiscal year 2012, the property,plant and equipment balance and the long-term lease financing obligations balance on our consolidated balance sheet and will both declineby approximately $12.2 million.
Interest expense for the Hillview Facility lease financing obligation and design tools for the periods indicated below was as follows (inthousands):
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
Interest expense $ 1,252 $ 1,285 $ 1,311
In the course of our business, we enter into arrangements accounted for as operating leases. Our current arrangements relate toengineering design software licenses and office space. As of March 27, 2011, our future obligations under these arrangements were $5.7million and $1.5 million, respectively.
In fiscal year 2011, the lessor for the Hillview Facility made a remediation claim for damages related to our lease. Based on such claim,we submitted a proposal to the lessor to settle the claim and recorded an accrual of $0.4 million in fiscal year 2011.
NOTE 16. COMMITMENTS AND CONTINGENCIES
In 1986, Micro Power Systems Inc. (“MPSI”), a subsidiary that we acquired in June 1994, identified low-level groundwatercontamination at its principal manufacturing site. The area and extent of the contamination appear to have been defined. MPSI previouslyreached an agreement with a prior tenant to share in the cost of ongoing site investigations and the operation of remedial systems to removesubsurface chemicals. The frequency and number of wells monitored at the site was reduced with prior regulatory approval for a plumestability analysis as an initial step towards site closure. No significant rebound concentrations have been observed. The groundwater treatmentsystem remains shut down. In July 2008, we evaluated the effectiveness of the plume stability and decided to initiate an alternative treatmentprogram to pursue a no further action order for the site. The program was approved by the state and implementation started in October 2009.As of March 27, 2011 and March 28, 2010, the outstanding liabilities for remediation options and future monitoring were $113,000 and$137,000, respectively.
Generally, we warrant all custom products and application specific products, including cards and boards, against defects in materials andworkmanship for a period of 12 months and occasionally we may provide an extended warranty of up to three years from the delivery date.We warrant all of our standard products against defects in materials and workmanship for a period of 90 days from the date of delivery.Reserve requirements are recorded in the period of sale and are based on an assessment of the products sold with warranty and historicalwarranty costs incurred. Our liability is generally limited to replacing, repairing or issuing credit, at our option, for the product if it has beenpaid for. The warranty does not cover damage which results from accident, misuse, abuse, improper line voltage, fire, flood, lightning or otherdamage resulting from modifications, repairs or alterations performed other than by us, or resulting from failure to comply with our writtenoperating and maintenance instructions. Warranty expense has historically been immaterial for our products. The warranty liabilities related toour products as of March 27, 2011 and March 28, 2010 were immaterial.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
In the ordinary course of business, we may provide for indemnification of varying scope and terms to customers, vendors, lessors,business partners, purchasers of assets or subsidiaries, and other parties with respect to certain matters, including, but not limited to, lossesarising out of our breach of agreements or representations and warranties made by us, services to be provided by us, intellectual propertyinfringement claims made by third parties or, with respect to the sale of assets or a subsidiary, matters related to our conduct of the businessand tax matters prior to the sale. In addition, we have entered into indemnification agreements with our directors and certain of our executiveofficers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or serviceas directors or executive officers. We maintain director and officer liability insurance, which may cover certain liabilities arising from ourobligation to indemnify our directors and officers, and former directors and officers of acquired companies, in certain circumstances. It is notpossible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of priorindemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements mightnot be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements andwe have not accrued any liabilities related to such indemnification obligations in our consolidated financial statements.
NOTE 17. LEGAL PROCEEDINGS
From time to time, we are involved in various claims, legal actions and complaints arising in the normal course of business. We are not anamed party to any currently ongoing lawsuit or formal proceeding that, in the opinion of our management, is likely to have a material adverseeffect on our financial position, results of operations or cash flows.
NOTE 18. INCOME TAXES
The components of the provision for (benefit from) income taxes are as follows (in thousands) as of the dates indicated:
March 27,2011
March 28,2010
March 29,2009
Current:
Federal $ (37) $ (181) $ (8) State (106) (240) (234) Foreign 388 250 192
Total current $ 245 $ (171) $ (50) Deferred:
Federal $ 9 $ (270) $ (450) State 1 (22) (35)
Total deferred $ 10 $ (292) $ (485) Total provision for (benefit from) income taxes $ 255 $ (463) $ (535)
Consolidated pre-tax income included foreign income of $1.0 million, $2.4 million and $0.2 million for fiscal years 2011, 2010 and2009, respectively. Undistributed earnings of $7.0 million of our foreign subsidiaries are considered to be indefinitely reinvested and,accordingly, no provision for federal and state income taxes
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
have been provided thereon. Upon distribution of those earnings in the form of a dividend or otherwise, we would be subject to both UnitedStates income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.
Significant components of our net deferred taxes are as follows (in thousands) as of the dates indicated:
March 27,2011
March 28,2010
March 29,2009
Deferred tax assets:
Reserves and expenses not currently deductible $ 9,596 $ 8,119 $ 7,701 Net operating loss carryforwards 110,763 101,691 84,528 Tax credits 25,464 20,641 15,960 Losses on investments 2,259 2,251 16,995 Capitalized R&D expenses 13,159 12,521 4,048 Deferred margin 5,693 5,570 3,846 Depreciation 3,756 2,259 197
Total deferred tax assets 170,690 153,052 133,275 Deferred tax liabilities:
Reconciliations of the income tax provision at the statutory rate to our provision for (benefit from) income tax are as follows (inthousands) as of the dates indicated:
March 27,2011
March 28,2010
March 29,2009
Income tax provision at statutory rate $(12,395) $ (9,830) $(25,750) State income taxes, net of federal tax benefit (997) (763) (1,970) Deferred tax assets not benefited 14,599 9,910 12,867 Tax credits (1,605) (1,499) (1,315) Stock-based compensation 751 570 498 Goodwill impairment — — 15,491 Acquisition cost — 2,348 — Foreign rate differential (61) (730) 56 Prior year tax expense true-up (24) (150) (96) Other, net (13) (319) (316) Provision for (benefit from) income taxes $ 255 $ (463) $ (535)
As of March 27, 2011, our federal and state net operating loss carryforwards for income tax purposes were approximately $285.0million and $139.0 million, respectively. If not utilized, some of the federal net operating loss carryovers will begin expiring in fiscal year2019, while the state net operating losses will begin to expire in 2012. As of March 27, 2011, our Canadian net operating loss carryforwardfor income tax purposes is approximately $3.0 million. If not utilized, some of the Canadian net operating loss carryovers will begin expiringin fiscal year 2012.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
As of March 27, 2011, our federal and state tax credit carryforwards were $9.0 million and $11.0 million, respectively. Federal creditswill begin to expire in fiscal year 2016. Canadian credits will begin to expire in fiscal year 2015.
Utilization of these federal and state net operating loss and tax credit carryforwards may be subject to a substantial annual limitation dueto the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions.
We have evaluated our deferred tax assets and concluded that a valuation allowance is required for that portion of the total deferred taxassets that are not considered more likely than not to be realized in future periods. To the extent that the deferred tax assets with a valuationallowance become realizable in future periods, we will have the ability, subject to carryforward limitations, to benefit from these amounts.Approximately $13.0 million of these deferred tax assets pertain to certain net operating loss and credit carryforwards that resulted from theexercise of employee stock options. When recognized, the tax benefit of these carryforwards is accounted for as a credit to additional paid-incapital rather than a reduction of the income tax provision.
Uncertain Income Tax Benefits
A reconciliation of the beginning and ending amount of the unrecognized tax benefits during the tax year ended March 27, 2011 is asfollows (in thousands):
Amount
Unrecognized tax benefits as of March 30, 2008 $ 9,410 Gross increase related to prior year tax positions — Gross increase related to current year tax positions 592 Lapses in statute of limitation (70) Unrecognized tax benefits as of March 29, 2009 9,932 Gross increase related to prior year tax positions 1,975 Gross increase related to current year tax positions 4,050 Lapses in statute of limitation (94) Unrecognized tax benefits as of March 28, 2010 15,863 Gross increase related to prior year tax positions 179 Gross increase related to current year tax positions 857 Lapses in statute of limitation (185) Unrecognized tax benefits as of March 27, 2011 $16,714
Of the total unrecognized gross tax benefit of $16.7 million, $3.7 million is presented within income taxes payable, non-current, and$13.0 million is presented as a reduction to deferred tax assets. We do not anticipate a significant increase or decrease to our unrecognized taxbenefits within the next twelve months.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of the provision for incometaxes in the consolidated statement of operations. Accrued interest and penalties were $0.3 million and $0.4 million as of March 27, 2011 andMarch 28, 2010, respectively.
Our only major tax jurisdictions are the United States federal and various states. The fiscal years 2001 through 2010 remain open andsubject to examinations by the appropriate governmental agencies in the United States and certain of our state jurisdictions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
NOTE 19. SEGMENT AND GEOGRAPHIC INFORMATION
We operate in one reportable segment, which is comprised of one operating segment. We design, develop and market high- performance,analog and mixed-signal silicon solutions and software and subsystem solutions for a variety of markets including communications, datacomand storage, interface and power management. The nature of our products and production processes and the type of customers and distributionmethods are consistent among all of our products.
Our net sales by product lines are summarized as follows (in thousands):
Total net sales $146,005 $134,878 $115,118 * Incremental revenues from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4,
2009, June 18, 2009 and March 17, 2010, respectively.
Our foreign operations are conducted primarily through our wholly-owned subsidiaries in Canada, China, France, Germany, Italy,Japan, Malaysia, Singapore, South Korea, Taiwan and the United Kingdom. Our principal markets include North America, Europe and theAsia Pacific region. Net sales by geographic areas represent sales to unaffiliated customers.
Our net sales by geographic areas are summarized as follows (in thousands):
Fiscal Years Ended
March 27,2011
March 28,2010
March 29,2009
United States $ 31,678 $ 34,291 $ 28,517 China 49,738 47,192 27,384 Singapore 14,445 14,393 14,894 Japan 9,098 7,240 7,170 Germany 13,619 1,982 3,535 Europe (excluding Germany) 9,486 17,405 21,558 Rest of world 17,941 12,375 12,060
Total net sales $146,005 $134,878 $115,118 * Incremental revenues from Hifn, Galazar and Neterion have been included in our consolidated financial statements since April 4,
2009, June 18, 2009 and March 17, 2010, respectively.
Substantially all of our long-lived assets at March 27, 2011 and March 28, 2010 were located in the United States.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009
NOTE 20. ALLOWANCES FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
We had the following activities for the allowance for sales returns and allowance and for doubtful accounts (in thousands):
Classification
Balanceat Beginning
of Year Additions
Write-offsAnd
Recoveries(1)
Balanceat Endof Year
Allowance for sales returns:
Year ended March 27, 2011 $ 1,250 $14,790 $ 14,795 $1,245 Year ended March 28, 2010 1,213 12,011 11,974 1,250 Year ended March 29, 2009 1,992 7,871 8,650 1,213
Allowance for doubtful accounts:
Year ended March 27, 2011 186 145 53 278 Year ended March 28, 2010 95 85 (6) 186 Year ended March 29, 2009 143 (47) 1 95
(1) Write-off and recovery amounts within allowance for sales returns reflect credits issued to distributors for stock rotations and volume
discounts.
NOTE 21. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited quarterly financial data for fiscal years 2011 and 2010. In the opinion of management,this unaudited information has been prepared on the same basis as the audited information and includes all adjustments, consisting only ofnormal and recurring adjustments necessary to state fairly the information set forth therein. Results for a given quarter are not necessarilyindicative of results for any subsequent quarter (in thousands, except per share data. Net loss per share for the four quarters of each fiscal yearmay not sum to the total for the fiscal year, because of the different number of shares outstanding during each period). Fiscal Year 2011 Fiscal Year 2010
Classification
March 27,2011(1)
December 26,2010(2)
September 26,2010(3)
June 27,2010(4)
March 28,2010(5)
December 27,2009(6)
September 27,2009(7)
June 28,2009(8)
Consolidated Statement ofOperations Data:
Net revenues $ 33,771 $ 35,365 $ 37,233 $39,636 $38,497 $ 33,931 $ 31,588 $ 30,862 Gross profit 11,807 16,083 17,291 18,816 19,402 17,045 14,090 12,845 Loss from operations (19,516) (6,286) (5,632) (8,584) (4,539) (5,317) (9,573) (14,561) Net loss (18,836) (4,959) (4,459) (7,414) (3,310) (3,762) (8,163) (12,875)
Net loss per share:
Basic and Diluted $ (0.42) $ (0.11) $ (0.10) $ (0.17) $ (0.08) $ (0.09) $ (0.19) $ (0.30) Shares used in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)
FISCAL YEARS ENDED MARCH 27, 2011, MARCH 28, 2010, AND MARCH 29, 2009 (1) Includes $1.8 million amortization expenses related to purchased assets in connection with the Neterion, Galazar, Hifn and Sipex
acquisitions; $7.5 million impairment charges to intangible assets related to the decision to exit the 10 GbE market; and $3.6 million of exitcosts related to the decision to exit the 10 GbE market.
(2) Includes $1.9 million amortization expenses related to purchased assets in connection with the Neterion, Galazar, Hifn and Sipexacquisitions.
(3) Includes $2.9 million amortization expenses related to purchased assets in connection with the Neterion, Galazar, Hifn and Sipexacquisitions.
(4) Includes $2.9 million amortization expenses related to purchased assets in connection with the Neterion, Galazar, Hifn and Sipexacquisitions; and $0.3 million in acquisition related costs.
(5) Includes $2.3 million amortization expenses related to purchased assets in connection with the Neterion, Galazar, Hifn and Sipexacquisitions; $0.6 million in acquisition related costs; and $0.1 million fair value adjustment of inventories in connection with Galazaracquisition.
(6) Includes $1.9 million amortization expenses related to purchased assets in connection with the Galazar, Hifn and Sipex acquisitions; $0.4million in acquisition related costs; and $0.1 million fair value adjustment of inventories in connection with Galazar acquisition.
(7) Includes $2.4 million amortization expenses related to purchased assets in connection with the Galazar, Hifn and Sipex acquisitions; $0.8million in acquisition related costs; $0.4 million fair value adjustment of inventories in connection with Galazar acquisition; and $0.2million impairment loss related to the investment in marketable and non-marketable securities.
(8) Includes $2.1 million amortization expenses related to purchased assets in connection with the Galazar, Hifn and Sipex acquisitions; $4.5million in acquisition related costs; $1.8 million fair value adjustment of inventories in connection with the Hifn and Galazar acquisition;$0.1 million separation expense related to an executive officer; and $0.1 million impairment loss related to the investment in marketableand non-marketable securities.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE
None. ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures (“Disclosure Controls”)
Disclosure Controls, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), are controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under theExchange Act is recorded, processed, summarized and reported within the time periods as specified in the SEC’s rules and forms. In addition,Disclosure Controls are designed to ensure the accumulation and communication of information required to be disclosed in reports filed orsubmitted under the Exchange Act to our management, including the Chief Executive Officer (our principal executive officer) (the “CEO”) andChief Financial Officer (our principal financial officer) (the “CFO”), to allow timely decisions regarding required disclosure.
We evaluated the effectiveness of the design and operation of our Disclosure Controls, as defined by the rules and regulations of theSEC (the “Evaluation”), as of the end of the period covered by this Annual Report. This Evaluation was performed under the supervision andwith the participation of management, including our CEO, as principal executive officer, and CFO, as principal financial officer.
Attached as Exhibits 31.1 and 31.2 of this Annual Report are the certifications of the CEO and the CFO, respectively, pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 (the “Certifications”). This section of the Annual Report provides information concerning theEvaluation referred to in the Certifications and should be read in conjunction with the Certifications.
Based on the Evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective as of the end of fiscal year 2011.
Inherent Limitations on the Effectiveness of Disclosure Controls
Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all errors and all fraud.Disclosure Controls, no matter how well conceived, managed, utilized and monitored, can provide only reasonable assurance that theobjectives of such controls are met. Therefore, because of the inherent limitation of Disclosure Controls, no evaluation of such controls canprovide absolute assurance that all control issues and instances of fraud, if any, within us have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management conductedan assessment of our internal control over financial reporting as of March 27, 2011 based on the framework established by the Committee ofSponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework . Based on this assessment,management concluded that, as of March 27, 2011, our internal control over financial reporting was effective.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of itsinherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance, and is subject to lapsesin judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion orimproper management
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override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internalcontrol over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore it ispossible to design into the process safeguards to reduce, though not eliminate, this risk.
The effectiveness of our internal control over financial reporting as of March 27, 2011 has been audited by PricewaterhouseCoopersLLP, an independent registered public accounting firm, as stated in their report included in this Annual Report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2011 that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION
None.
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PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the information set forth under the captions “Election ofDirectors,” “Corporate Governance and Board Matters,” “Executive Compensation Matters” and “Section 16(a) Beneficial OwnershipReporting Compliance” in our Definitive Proxy Statement in connection with our 2011 Annual Meeting of Stockholders (“2011 DefinitiveProxy Statement”) which will be filed with the Securities and Exchange Commission no later than 120 days after March 27, 2011.
Executive Officers
A listing of Executive Officers of Exar and certain other information required by Item 10 with respect to our executive officers is setforth under the caption “Executive Officers of the Registrant” in Part I, Item 1 of this Report and is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Ethics for Principal Executives, Executive Management and Senior Financial Officers, a Code of BusinessConduct and Ethics and a Financial Integrity Compliance Policy. These documents can be found on our website: www.exar.com. We will postany amendments to the codes and policy, as well as any waivers that are required to be disclosed by the rules of either the SEC or theNASDAQ on our website, or by filing a Form 8-K. Hard copies can be obtained free of charge by submitting a written request to:
Exar Corporation48720 Kato RoadFremont, California 94538Attn: Investor Relations, M/S 210 ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions “Executive Compensation” and “Compensation Committee Reporton Executive Compensation” in our 2011 Definitive Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is set forth under the captions “Security Ownership of Certain Beneficial Owners andManagement” and “Equity Compensation Plan Information” in our 2011 Definitive Proxy Statement and is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is set forth under the captions “Certain Relationships and Related Transactions” and “CorporateGovernance and Board Matters” in our 2011 Definitive Proxy Statement and is hereby incorporated by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is set forth under the caption “Ratification of Appointment of Independent Registered PublicAccounting Firm” in our 2011 Definitive Proxy Statement and is hereby incorporated by reference.
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PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Form 10-K:
(1) All Financial Statements. The financial statements of the Company are included herein as required in Part II, Item 8—“FinancialStatements and Supplementary Data” of this Annual Report. See Index to Financial Statements on page 51.
(2) Financial Statement Schedules. See “Notes to Consolidated Financial Statements, Note 20—Allowance for Sales Returns andDoubtful Accounts.” Schedules not listed have been omitted because information required to be set forth therein is not applicable or isshown in the financial statements or notes thereto.
(3) Exhibits. See Part IV, Item 15(b) below.
(b) The exhibits listed in the Exhibit Index, which follows the signature page to this Annual Report, are filed or incorporated byreference into this Annual Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.
EXAR CORPORATION
By: /s/ PEDRO (PETE) P. RODRIGUEZ
Pedro (Pete) P. Rodriguez
Chief Executive Officer and President(Principal Executive Officer)
Date: June 10, 2011
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Pedro(Pete) P. Rodriguez and Kevin Bauer, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution andre-substitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to filethe same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting untosaid attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite andnecessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying andconfirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to bedone by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ PEDRO (PETE) P. RODRIGUEZ (Pedro (Pete) P. Rodriguez)
Chief Executive Officer, President and Director(Principal Executive Officer)
June 10, 2011
/S/ KEVIN BAUER (Kevin Bauer)
Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
June 10, 2011
/S/ DR. IZAK BENCUYA (Dr. Izak Bencuya)
Director
June 10, 2011
/S/ PIERRE GUILBAULT (Pierre Guilbault)
Director
June 10, 2011
/S/ BRIAN HILTON (Brian Hilton)
Director
June 10, 2011
/s/ RICHARD L. LEZA (Richard L. Leza)
Chairman of the Board
June 10, 2011
/S/ GARY MEYERS (Gary Meyers)
Director
June 10, 2011
(J. Oscar Rodriguez)
Director
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EXHIBIT INDEX
ExhibitNumber
Incorporated by Reference
Exhibit Form File No. Exhibit Filing Date
2.1
Agreement and Plan of Merger by and among Exar Corporation, SipexCorporation and Side Acquisition Corp., dated as of May 7, 2007 8-K 0-14225 2.1 5/8/2007
2.2
Agreement and Plan of Merger, dated as of February 23, 2009, among ExarCorporation, Hybrid Acquisition Corp. and hi/fn, inc. 8-K 0-14225 2.1 2/27/2009
3.1 Restated Certificate of Incorporation of Exar Corporation 8-K 0-14225 3.3 9/17/2010
3.2 Bylaws of Exar Corporation 8-K 0-14225 3.1 9/17/2010
10.1*+
1989 Employee Stock Participation Plan, as amended, and related Offeringdocuments 10-K 0-14225 10.1 6/12/2006
10.2*+
1996 Non-Employee Directors’ Stock Option Plan, as amended, and relatedforms of stock option grant and exercise 10-K 0-14225 10.6 6/12/2006
10.3*
1997 Equity Incentive Plan, as amended, and related forms of stock option grantand exercise 10-K 0-14225 10.7 6/14/2005
10.4*
2000 Equity Incentive Plan, as amended, and related forms of stock option grantand exercise 10-K 0-14225 10.9 6/14/2005
10.18* Letter Agreement Regarding Change of Control for Thomas R. Melendrez 10-K 0-14225 10.11 6/27/2001
10.19* Executive Officers’ Group II Change of Control Severance Benefit Plan 10-Q 0-14225 10.1 2/6/2009
10.20* Letter Agreement Regarding Change of Control for Paul Pickering 10-Q 0-14225 10.1 8/5/2010
10.21* Letter Agreement Regarding Change of Control for George Apostol 10-Q 0-14225 10.2 8/5/2010
10.22* Letter Agreement Regarding Change of Control for Kevin Bauer 8-K 0-14225 10.2 9/17/2010
10.23
Amendment No. 3, entered October 29, 2007, to that certain Distributor Agreement,dated July 1, 1997, by and between Exar Corporation and Future ElectronicsIncorporated. 10-Q 0-14225 10.1 2/8/2008
10.24
Amendment No. 4, entered October 29, 2007, to that certain Domestic DistributorAgreement, dated December 1, 2001, by and between Exar Corporation andNuHorizons, Inc. 10-Q 0-14225 10.2 2/8/2008
21.1** Subsidiaries of the Company
23.1**
Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopersLLP
24.1** Power of Attorney. Reference is made to the signature page in this Form 10-K.
31.1**
Principal Executive Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002
31.2**
Principal Financial Officer Certification pursuant to Section 302 of the Sarbanes-OxleyAct of 2002
32.1***
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2***
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Indicates management contracts or compensatory plans or arrangements filed pursuant to Item 601(b)(10) of Regulation S-K.** Filed herewith.*** Furnished herewith.+ Related forms of Stock Option Grant and Exercise filed as part of an exhibit to Exar’s Annual Report on Form 10-K for fiscal year
ended March 31, 2005, and incorporated herein by reference.++ Related forms of Notice of Grant and Terms and Conditions of Stock Options filed as Exhibits 10.2, 10.3 and 10.6 to Exar’s Report on
Form 8-K filed with the SEC on September 13, 2006. Related form of Stock Unit Award Agreement filed as Exhibit 10.2 to Exar’sQuarterly Report on Form 10-Q filed with the SEC on February 6, 2009. Related form of Performance Stock Unit Award Agreementfiled as Exhibit 10.1 to Exar’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2009. Related form of DirectorRestricted Stock Unit Award Agreement filed as Exhibit 10.7 to Exar’s Quarterly Report on Form 10-Q filed with the SEC onNovember 4, 2010. All such forms are incorporated herein by reference.
111
EXHIBIT 21.1
EXAR CORPORATIONLIST OF SUBSIDIARIES
1. Micro Power Systems, Inc. (a California corporation). 2. Exar Canada Corporation (a Canadian corporation). 3. Exar SARL (a French limited liability corporation). 4. Exar GMBH (a German corporation). 5. Exar Srl (an Italian corporation). 6. Exar Japan Corporation (a Japanese corporation). 7. Exar Korea Co. Ltd. (a Korean limited liability corporation). 8. Exar Malaysia SDN BHD (a Malaysian limited liability corporation). 9. Exar Ltd. (a United Kingdom limited liability corporation). 10. Exar (Hangzhou) Information Technology Co., Ltd. Beijing Branch. 11. Exar (Hangzhou) Information Technology Co., Ltd. Shanghai Branch. 12. Exar (Delaware) Corporation Shenzhen Representative Office. 13. Exar (Delaware) Corporation Taiwan Branch Office. 14. Exar (Hangzhou) Information Technologies Co., Ltd. (a People’s Republic of China limited liability corporation). 15. Exar Corporation Hong Kong Branch office.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-147154 and 333-147153),Form S-4 (Nos. 333-143243 and 333-157724) and Form S-8 (Nos. 333-145741, 333-138839, 333-96967, 333-55082, 333-48226, 333-31120, 333-69381, 333-37371, 333-37369 and 33-58991) of Exar Corporation of our report dated June 10, 2011 relating to the financialstatements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLPSan Jose, CaliforniaJune 10, 2011
EXHIBIT 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
I, Pedro (Pete) P. Rodriguez, certify that:
1. I have reviewed this Annual Report on Form 10-K of Exar Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect tothe period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisreport;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in ExchangeAct Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.
Date: June 10, 2011
/s/ PEDRO (PETE) P. RODRIGUEZ
Pedro (Pete) P. RodriguezChief Executive Officer, President and Director
(Principal Executive Officer)
EXHIBIT 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
I, Kevin Bauer, certify that:
1. I have reviewed this Annual Report on Form 10-K of Exar Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect tothe period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisreport;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in ExchangeAct Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based onsuch evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materiallyaffected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing theequivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financialinformation; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting.
Date: June 10, 2011
/s/ KEVIN BAUER
Kevin BauerVice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO
18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Pedro (Pete) P. Rodriguez, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002, that, to my knowledge, the Annual Report of Exar Corporation on Form 10-K for the period ended March 27, 2011 fully complieswith the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Reporton Form 10-K fairly presents in all material respects the financial condition and results of operations of Exar Corporation.
Date: June 10, 2011
/s/ PEDRO (PETE) P. RODRIGUEZ
Pedro (Pete) P. RodriguezChief Executive Officer, President and Director
(Principal Executive Officer)
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO
18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin Bauer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,that, to my knowledge, the Annual Report of Exar Corporation on Form 10-K for the period ended March 27, 2011 fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form10-K fairly presents in all material respects the financial condition and results of operations of Exar Corporation.
Date: June 10, 2011
/s/ KEVIN BAUER
Kevin BauerVice President and Chief Financial Officer
